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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 1-13754
ALLMERICA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3263626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Lincoln Street, Worcester, 01653
Massachusetts (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (508) 855-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class of securities Name of Exchange on which Registered
--------------------------------- ------------------------------------
Common Stock, $.01 par value, together
with Stock Purchase Rights New York Stock Exchange
7 5/8% Senior Debentures due 2025 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing sales price of March 15, 1999 the aggregate market
value of the voting and non-voting stock held by nonaffiliates of the
registrant was $2,983,288,029.
The number of shares outstanding of the registrant's common stock, $.01 par
value, was 56,729,421 shares outstanding as of March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Allmerica Financial Corporation's Annual Report to Shareholders
for 1998 are incorporated by reference in Parts I, II, and IV. Portions of
Allmerica Financial Corporation's Proxy Statement of Annual Meeting of
Shareholders to be held May 11, 1999 are incorporated by reference in Part
III.
Total number of pages, including cover page: 51
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PART I
ITEM I
BUSINESS
Organization
Allmerica Financial Corporation ("AFC" or the "Company") is a non-insurance
holding company organized as a Delaware corporation in 1995. The consolidated
financial statements of AFC include the accounts of AFC, First Allmerica
Financial Life Insurance Company ("FAFLIC") its wholly-owned life insurance
subsidiary, Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"),
Allmerica Property & Casualty Companies, Inc. ("Allmerica P&C", a wholly-owned
non-insurance holding company), The Hanover Insurance Company ("Hanover", a
wholly-owned subsidiary of Allmerica P&C), Citizens Corporation (formerly an
82.5% owned subsidiary of Hanover), Citizens Insurance Company of America
("Citizens", a wholly-owned subsidiary of Citizens Corporation) and certain
other insurance and non-insurance subsidiaries.
On December 3, 1998, a wholly owned subsidiary of the Company completed a
cash tender offer to acquire the outstanding shares of Citizens Corporation
common stock that AFC or its subsidiaries did not already own at a price of
$33.25 per share. Approximately 99.8% of publicly held shares of Citizens
Corporation common stock were tendered. On December 14, 1998, the Company
completed a short-form merger, acquiring all shares of common stock of
Citizens Corporation not purchased in the tender offer, through the merger of
its wholly-owned subsidiary with Citizens Corporation.
Financial Information About Operating Segments
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas,
the Company conducts business principally in four operating segments. These
segments are Property and Casualty; Corporate Risk Management Services;
Allmerica Financial Services; and Allmerica Asset Management. In addition to
the four operating segments, the Company also has a Corporate segment, which
consists primarily of cash, investments, Corporate debt and Capital
Securities.
Information with respect to each of the Company's segments is included in
"Segment Results" on pages 26-39 in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Note 15 on pages 77 and
78 of the Notes to the Consolidated Financial Statements included in the 1998
Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference.
Description of Business by Segment
Following is a discussion of each of the Company's operating segments.
Risk Management
Property and Casualty
General
The Company's Property and Casualty segment is composed of its wholly-owned
subsidiary, Allmerica P&C, which consists of The Hanover Insurance Company and
its wholly-owned subsidiary, Citizens Corporation. For the year ended December
31, 1998, the Property and Casualty segment accounted for approximately
$2,204.8 million, or 65.4%, of consolidated segment revenues and approximately
$151.4 million, or 50.7%, of consolidated segment income before taxes and
minority interest. The Company primarily underwrites personal and commercial
property and casualty insurance through this segment, with Hanover's principal
operations located in the Northeast and Citizens' in Michigan. Both Hanover
and Citizens have a historically strong regional focus and both place heavy
emphasis on underwriting profitability and loss reserve
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adequacy. As of December 31, 1997, according to A.M. Best, the Property and
Casualty segment ranks as the 24th largest property and casualty insurance
group in the United States based on net premiums written.
The Company strives to maintain a clear focus on the core disciplines of
underwriting, pricing, claims adjusting, marketing and sales. In particular,
the Property and Casualty segment seeks to achieve and maintain underwriting
profitability in each of its major product lines. The Company's overall
strategy is to improve profitability through operating efficiencies and to
pursue measured growth in profitable markets.
The industry's profitability can be affected significantly by price
competition, volatile and unpredictable developments such as extreme weather
conditions and natural disasters, legal developments affecting insurer
liability and the size of jury awards, fluctuations in interest rates and
other factors that may affect investment returns and other general economic
conditions and trends, such as inflationary pressures that may affect the
adequacy of reserves.
In 1998, the Company, in the Property and Casualty segment, began efforts to
consolidate processing centers from 14 regional branches to 3 regional
business centers. The three regional business centers are located in Atlanta,
Georgia; Howell, Michigan; and Worcester, Massachusetts. The Company will
continue to maintain its local market presence through branch/sales
underwriting offices located throughout the country. In addition to the
consolidation of offices, the Property and Casualty segment began deploying
imaging and workflow technology in the centers which are expected to provide
greater efficiencies and enable expense reductions. This technology allows the
field agents direct access to underwriting documentation, which management
believes will result in increased service levels and reduced cycle time.
In 1998, the Company initiated a multi-functional team concept in servicing
its personal lines of business. This arrangement provides for Company
resources to focus on more than one area of the business including
underwriting, policy processing and customer service when interacting with
agents. The Company believes this approach will allow for closer alignment and
enhanced service to our agents along with increased efficiencies.
Lines of Business
Hanover and Citizens both underwrite personal and commercial property and
casualty insurance coverage. The personal segment principally includes
personal automobile and homeowners' coverage. The commercial segment
principally includes workers' compensation, commercial automobile and
commercial multiple peril coverage.
Personal automobile coverage insures individuals against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Homeowners coverage insures individuals for losses to their residences and
personal property, such as those caused by fire, wind, hail, water damage
(except for flooding), theft and vandalism, and against third party liability
claims.
Commercial automobile coverage insures businesses against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Workers' compensation coverage insures employers against employee medical
and indemnity claims resulting from injuries related to work. Workers'
compensation policies are often written in conjunction with other commercial
policies.
Commercial multiple peril coverage insures businesses against third party
liability from accidents occurring on their premises or arising out of their
operations, such as injuries sustained from products sold. It also insures
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business property for damage, such as that caused by fire, wind, hail, water
damage (except for flooding), theft and vandalism.
Customers, Marketing and Distribution
Through its property and casualty insurance subsidiaries, the Company is
licensed to sell property and casualty insurance in all fifty states in the
United States, as well as the District of Columbia. Hanover's business is
concentrated in the Northeast, primarily Massachusetts, New York, New Jersey
and Maine. Citizens' business is predominantly in Michigan and continues to
expand into Indiana and Ohio.
The Company markets property and casualty insurance products through
approximately 2,500 independent insurance agencies and seeks to establish
long-term relationships with larger, well-established agencies. In selecting
agencies for new appointments, the Company considers the following criteria: a
record of profitability and financial stability, an experienced and
professional staff, a marketing plan for future growth and a succession plan
for management. Once appointed, each agency's performance is carefully
monitored.
Since the Company offers property and casualty insurance products
predominately through independent agents, fostering a close, supportive
relationship with each agency is critical to the continued growth of the
business. The Company, in the Property and Casualty segment, compensates
agents based on profitability, in addition to regular commission. This
practice motivates its agents to write policies for customers with above-
average profit characteristics. By offering its independent agents a
consistent source of products demanded by the agents' customers, the Company
believes that an increasing number of its agents will rely on it as their
principal supplier of insurance products. The Property and Casualty segment
has implemented a number of programs designed to strengthen its relationship
with its agencies. These initiatives include the formation of a National
Agency Advisory Council at Hanover, and a Regional Agents Advisory Council at
Citizens, consisting of agent representatives. These councils seek to
coordinate marketing efforts, support implementation of the Company's
strategies and enhance local market presence. Citizens' position as a
principal provider with many of its agencies is evidenced by its high average
premiums written per agency of approximately $1.6 million in 1998 in Michigan.
Over the past few years, the Company has begun to exploit the benefits of
worksite marketing as a distribution channel for personal property and
casualty lines. This worksite distribution channel offers discounted insurance
products that are individually written to employees and members of
organizations which have established a marketing agreement with the Company.
Management believes that advantages of competitive pricing, effective consumer
awareness campaigns at sponsoring organizations, the convenience of payroll
deducted premiums and word of mouth advertising will contribute to the
effectiveness of the worksite distribution channel. Also, the Company, through
the Property and Casualty segment, is exploring sales through banks and
electronic commerce. Additionally, the Company expects to be well positioned
to integrate other insurance products offered by its other subsidiaries in
order to maximize corporate worksite marketing relationships.
Citizens develops and markets franchise programs that are tailored for
members of associations and organizations, including its Citizens Best program
for senior citizens.
The Company, in the Property and Casualty segment, is not dependent upon a
single customer or a few customers, for which the loss of any one or more
would have an adverse effect upon the segment's insurance operations.
Hanover
Hanover accounted for approximately $1,083.7 million, or 55.1%, of the
Property and Casualty segment's consolidated net premium earned in 1998.
Hanover's products are marketed predominantly through independent agencies
which provide specialized knowledge of property and casualty products, local
market conditions and targeted customer characteristics.
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Hanover seeks to pursue measured growth in existing markets through local
management operations that apply extensive knowledge of markets to offer
competitive products and services. Hanover also seeks to increase operating
efficiencies through centralized strategic planning, marketing and
administrative support functions and increased use of sophisticated risk
selection and operational technologies.
Hanover is also expanding its use of agency-company interface ("ACI")
technology, which enables agents to electronically submit personal lines
policies for review and rating. The Company believes that these investments in
technology will, over time, create technological efficiencies and provide
capacity for enhanced service to customers.
Although Hanover's strategic planning and certain of its administrative
functions are centralized in the home office, the Company is committed to
maintaining the local market presence afforded by Hanover's twelve
branch/sales underwriting offices. These offices provide knowledge of local
regulatory and competitive conditions, and have developed close relationships
with Hanover's independent agents, who provide specialized knowledge of
property and casualty products, local market conditions and target market
characteristics. Hanover believes that the selection of attractive markets in
which to pursue profitable growth depends upon maintaining its local market
presence to enhance underwriting results and identify favorable markets.
Citizens
Citizens accounted for approximately $882.6 million, or 44.9%, of the
Property and Casualty segment's consolidated net premium earned in 1998.
Citizens' products are also marketed through independent agencies which
provide specialized knowledge of property and casualty products, local market
conditions and targeted customer characteristics.
Citizens seeks to pursue profitable growth in existing markets by
establishing long-term relationships with larger, well-established agencies.
To solidify its relationship with higher quality agents, Citizens offers
enhanced profit sharing agreements, recognition awards and maintains local
presence through five branch/sales underwriting offices, three claims offices
in Michigan and one claim office in Indiana. In addition, Citizens continues
to maintain long-term pricing and underwriting integrity to remain a stable
market for the independent agents.
Citizens has been successful in developing and marketing groups in both
personal and commercial segments that are tailored for members of
associations, financial institutions and employers in Michigan, Indiana and
Ohio. The organizations may choose to make Citizens' programs available to
their members or employees based on an evaluation of Citizens' rates, service
and regulation, but each risk is individually underwritten and each customer
is issued a separate policy. Associations and organizations receive no payment
for making Citizens' franchise programs available to their members or
employees. As of December 31, 1998, Citizens had 144 group programs in-force,
116 of which were in personal lines and 28 of which were in commercial lines.
Revenue from personal and commercial lines groups accounts for nearly 50
percent of Citizens' total premium volume.
Citizens continues to expand its use of the Company's ACI technology, which
enables agents to electronically submit personal lines policies for review and
rating. In addition, agents are authorized to bind Citizens on risks. The
agents are guided by Citizens' written underwriting rules and practices. These
rules and practices set forth eligibility rules for various policies and
coverages, unacceptable risks, and maximum and minimum limits of liability.
Violation of these rules and practices is grounds for termination of the
agency's contract to represent Citizens.
Residual Markets and Pooling Arrangements
As a condition of its license to do business in various states, the Company
is required to participate in mandatory property and casualty shared market
mechanisms or pooling arrangements which provide various
5
insurance coverages to individuals or other entities that otherwise are unable
to purchase such coverage voluntarily provided by private insurers. For
example, since most states compel the purchase of a minimal level of
automobile liability insurance, states have developed shared market mechanisms
to provide the required coverages and in many cases, optional coverages, to
those drivers who, because of their driving records or other factors, cannot
find insurers who will write them voluntarily. The Company's participation in
such shared markets or pooling mechanisms is generally proportional to the
Property and Casualty segment's direct writings for the type of coverage
written by the specific pooling mechanism in the applicable state. The Company
incurred an underwriting loss from participation in such mechanisms, mandatory
pools and underwriting associations of $11.6 million, $12.9 million and $5.3
million in 1998, 1997 and 1996, respectively, relating primarily to coverages
for personal and commercial automobile, personal and commercial property, and
workers' compensation. The increase in the underwriting loss since 1996 is
primarily related to Hanover's participation in the Massachusetts Commonwealth
Automobile Reinsurers ("CAR") pool which is consistent with the rate decrease
and higher actual loss activity experienced in the overall Massachusetts
automobile market.
Assigned Risk Plans
Assigned risk plans are the most common type of shared market mechanism.
Many states, including Massachusetts, Illinois, New Jersey and New York
operate assigned risk plans. The plan assigns applications from drivers who
are unable to obtain insurance in the voluntary market to insurers licensed in
the applicant's state. Each insurer is required to accept a specific
percentage of applications based on its market share of voluntary business in
the state. Once an application has been assigned to an insurer, the insurer
issues a policy under its own name and retains premiums and pays losses as if
the policy was voluntarily written.
Reinsurance Facilities and Pools
Reinsurance facilities are currently in operation in various states that
require an insurer to write all applications submitted by an agent. As a
result, an insurer could be writing policies for applicants with a higher risk
of loss than it would normally accept. The reinsurance facility allows the
insurer to cede this high risk business to the reinsurance facility, thus
sharing the underwriting experience with all other insurers in the state. If a
claim is paid on a policy issued in this market, the facility will reimburse
the insurer. Typically, reinsurance facilities operate at a deficit, which is
then recouped by levying assessments against the same insurers.
A type of reinsurance mechanism that exists in New Jersey, The New Jersey
Unsatisfied Claim and Judgment Fund ("NJUCJF"), covers no-fault first party
medical losses in excess of $0.08 million. All automobile insurers in this
state are required to participate in the reinsurance mechanism. Insurers are
reimbursed for their covered losses in excess of the threshold. Funding for
this fund comes from assessments against automobile insurers based upon their
proportionate market share of the state's automobile liability insurance
market. The NJUCJF currently has an unfunded liability for future payment
years. It calculates assessments against insurers on the basis of a two-year
cash flow analysis.
At December 31, 1998, CAR was the only reinsurer which represented 10% or
more of the Property and Casualty segment's reinsurance business. As a
servicing carrier in Massachusetts, the Company cedes a significant portion of
its private passenger and commercial automobile premiums to CAR. Net premiums
earned and losses and loss adjustment expenses ("LAE") ceded to CAR for the
years ended December 31, 1998, 1997 and 1996 were $34.3 million and $38.1
million, $32.3 million and $28.2 million, and $38.0 million and $21.8 million,
respectively.
The Company ceded to the Michigan Catastrophic Claims Association ("MCCA")
premiums earned of $3.7 million, $9.8 million and $50.5 million in 1998, 1997
and 1996, respectively. Losses and loss adjustment expenses ceded in 1998,
1997 and 1996 were $18.0 million, $(0.8) million and $(52.9) million,
respectively. The decrease in earned premiums ceded to MCCA reflects a
reduction in premiums charged per policyholder by MCCA. Additionally, on March
18, 1998, MCCA announced plans to refund $1.2 billion of its surplus to its
member insurance companies. The action occurred because the associations'
surplus increased beyond a level
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necessary to cover its expected losses and expenses. Because policyholders are
the ultimate payers of the MCCA premium, this extraordinary return of MCCA
surplus was passed through to policyholders. On June 2, 1998, the Company
recorded a $124.2 million one-time reduction of direct and ceded written
premiums as a result of a return of excess surplus from the MCCA. This
transaction had no impact on the total net premiums recorded by the Company in
1998.
At December 31, 1998 and 1997, the Company, in the Property and Casualty
segment, had reinsurance recoverable on paid and unpaid losses from CAR of
$41.0 million and $45.7 million, respectively, and from MCCA of $250.4 million
and $280.2 million, respectively. Management believes that in the current
regulatory climate, the Company, in the Property and Casualty segment, is
unlikely to incur any material loss or become unable to pay claims as a result
of nonpayment of amounts owed to it by CAR, because CAR is a mandated pool
supported by all insurance companies licensed to write automobile insurance in
the Commonwealth of Massachusetts. In addition, the MCCA (i) is currently in a
surplus position, (ii) the payment obligations of the MCCA are extended over
many years, resulting in relatively small current payment obligations in terms
of MCCA total assets, (iii) all amounts owed to the Company by the MCCA have
been paid when due, and (iv) the MCCA is supported by assessments permitted by
statute.
Reference is made to Note 17 on pages 78 and 79 and Note 21 on pages 81 and
82 of the Notes to Consolidated Financial Statements of the 1998 Annual Report
to Shareholders, the applicable portions of which are incorporated herein by
reference.
Joint Underwriting Associations
A joint underwriting association ("JUA") is similar to a reinsurance pool.
Generally, a JUA allows an insurer to share with other insurers the
underwriting experience of drivers that reflect a higher risk of loss than the
insurer would normally accept. Under a JUA, a limited number of insurers are
designated as "servicing carriers." The servicing carrier is responsible for
collecting premiums and paying claims for the policies issued in the JUA, and
such insurers receive a fee for these administrative services. The
underwriting results of the servicing carrier are then shared with all
insurers in the state. Like reinsurance facilities, JUA's typically operate at
a deficit, and fund that deficit by levying assessments on insurers.
Other Mechanisms
The principal shared market mechanisms for property insurance are the Fair
Access to Insurance Requirements Plans ("FAIR Plans"), the formation of which
was required by the federal government as a condition to an insurer's ability
to obtain federal riot reinsurance coverage following the riots and civil
disorder that occurred during the 1960's. These plans, created as mechanisms
similar to automobile assigned risk plans, were designed to increase the
availability of property insurance in urban areas. The federal government
reinsures those insurers participating in FAIR Plans against excess losses
sustained from riots and civil disorders. The individual state FAIR Plans are
created pursuant to statute or regulation. The property shared market
mechanisms provide basic fire insurance and extended coverage protection for
dwellings and certain commercial properties that could not be insured in the
voluntary market. A few states also include a basic homeowners form of
coverage in their shared market mechanism.
With respect to commercial automobile coverage, another pooling mechanism, a
Commercial Auto Insurance Plan ("CAIP"), uses a limited number of servicing
carriers to handle assignments from other insurers. The CAIP servicing carrier
is paid a fee by the insurer who otherwise would be assigned the
responsibility of handling the commercial automobile policy and paying claims.
Approximately 40 states have CAIP mechanisms, including Connecticut, Illinois,
New Hampshire, Maine, New Jersey and Rhode Island.
Competition
The property and casualty industry is highly competitive among national
agency companies, direct writers, and regional and local insurers on the basis
of both price and service. National agency companies sell insurance
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through independent agents and usually concentrate on commercial lines of
property and casualty insurance. Direct writers, including those with
exclusive agent representation, dominate the personal lines of property and
casualty insurance and operate on a national, regional or single state basis.
Regional and local companies sell through independent agents in one or several
states in the same region and usually compete in both personal and commercial
lines. Hanover and Citizens market through independent agents and therefore
compete with other independent agency companies for business in each of the
agencies representing them.
Hanover faces competition in personal lines primarily from direct writers
and regional and local companies. In its commercial lines, Hanover faces
competition primarily from national agency companies and regional and local
companies. Due to the number of companies in Hanover's principal property and
casualty insurance marketplace, there is no single dominant competitor in any
of Hanover's markets. Management believes that its emphasis on maintaining a
local presence in its markets, coupled with investments in operating and
client technologies, will enable Hanover to compete effectively.
During the past few years, the competitive environment in Massachusetts has
increased substantially. Approximately 36% of Hanover's personal automobile
business is currently written in this state. Effective January 1, 1999
Massachusetts's personal automobile rates increased 0.7% as mandated by the
Massachusetts Division of Insurance. Effective January 1, 1998 and January 1,
1997 Massachusetts's personal automobile rates decreased 4.0% and 6.2%,
respectively, as mandated by the Massachusetts Division of Insurance. The
Massachusetts Division of Insurance allows for sponsoring organizations to
receive discounts on their auto insurance premiums. Currently, Hanover offers
more than 100 group programs throughout the state, including a large group
plan in the state with approximately 347,000 eligible members. In 1998,
Hanover offered a 10% discount on automobile insurance for its safest drivers.
In 1999, the discount for safe drivers will be between 3% and 7%. As a result,
policyholders have the ability to reduce their insurance premiums by as much
as 17% by combining "safe driver" and "group" discounts. Management has
implemented these discounts in an effort to retain the Property and Casualty
segment's market share in Massachusetts. These discounts, together with any
future mandated rate decreases, may unfavorably impact premium growth in
Massachusetts.
In Michigan, Citizens competes in personal lines with a number of direct
writers and regional and local companies. Citizens is the largest writer of
property and casualty insurance in Michigan through independent agents.
Citizens' principal competition in the Michigan homeowners line is from direct
writers, including State Farm Group. Citizens also faces competition from the
two largest direct writers in Michigan, Auto Club Michigan Group and State
Farm Group, in the personal automobile line. In February 1996, an amendment to
the Essential Insurance Act became effective in Michigan. This amendment
eliminates personal automobile and homeowners insurance territorial rating
restrictions and limits merit ratings for automobile policies. This
legislation has removed barriers to entrance into the market for national
agency companies, which has resulted in increased competition in Michigan in
the personal lines of property and casualty insurance. This was, in part, due
to Michigan's prior insurance regulatory environment which required such
companies to develop and implement special incentive programs designed to
encourage agents to identify and sell insurance to individuals with lower risk
profiles consistent with the constraints of Michigan law.
Citizens faces commercial lines competition principally from national agency
companies, and regional and local companies. Citizens is the second leading
writer in Michigan in its three primary commercial lines combined: commercial
automobile, workers' compensation, and commercial multiple peril. The
commercial industry has been in a downturn over the past several years due
primarily to price competition. Premium rate levels are related to the
availability of insurance coverage, which varies according to the level of
excess capacity in the industry. The current commercial lines market is
extremely competitive due to a continuing soft market in which capacity is
high and prices are low. Because of the commitment at both Hanover and
Citizens to focus on underwriting profitability and a refusal to write
business at inadequate prices, this highly competitive commercial lines market
has impacted the Property and Casualty segment's growth in commercial lines.
In Michigan, Citizens workers' compensation line is the largest commercial
line in terms of premiums written. Over the past
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few years, competition has caused Citizens to reduce workers' compensation
insurance rates five times; 8.5%, 7.0%, 6.4%, 8.7% and 1.9% effective May 1,
1995, December 1, 1995, June 1, 1996, March 1, 1997, and January 1, 1998,
respectively.
Since there is no one dominant competitor in any of the markets in which the
Property and Casualty segment competes, management believes there is
opportunity for future growth.
Underwriting
Pricing
The manner in which the Company prices products takes into consideration the
expected frequency and severity of losses, the costs of providing the
necessary coverage (including the cost of administering policy benefits, sales
and other administrative and overhead costs) and a margin for profit.
The Company, in the Property and Casualty segment, seeks to achieve a target
combined ratio in each of its product lines regardless of market conditions.
This strategy seeks to achieve measured growth and consistent profitability on
a continuing basis. The Company concentrates on its established major product
lines, and accordingly, does not typically pursue the development of products
with relatively unpredictable risk profiles. In addition, the Company utilizes
its extensive knowledge of local markets, including knowledge of regulatory
requirements, to achieve superior underwriting results. Hanover and Citizens
rely on information provided by their local agents and both also rely on the
knowledge of its staff in the local branch offices. As regional companies with
significant market share in a number of states, Hanover and Citizens can apply
its extensive knowledge and experience in making underwriting and rate setting
decisions.
Claims
The Company employs experienced claims adjusters, appraisers, medical
specialists, managers and attorneys in order to manage its claims. The
Company, in the Property and Casualty segment, has field claims adjusters
strategically located throughout its operating territories. All claims staff
members work closely with the agents to settle claims rapidly and cost-
effectively.
Claims office adjusting staff are supported by general adjusters on large
property losses, automobile and heavy equipment damage appraisers on
automobile material damage losses and medical specialists whose principal
concentration is in workers' compensation and no-fault automobile injury
cases. In addition, the claims offices are supported by staff attorneys who
specialize in litigation defense and claim settlements. The Property and
Casualty segment also has special units which investigate suspected insurance
fraud and abuse.
The Company, in the Property and Casualty segment, utilizes claims
processing technology which allows smaller and more routine claims to be
processed at centralized locations. The Company expects that approximately 70%
of its personal lines claims will be processed at these locations, thereby
increasing efficiency and reducing operating costs.
Citizens has a program under which participating agents have settlement
authority for many property loss claims. Based upon the program experience,
the Property and Casualty segment believes that this program contributes to
lower LAE experience and to its higher customer satisfaction ratings by
permitting the early and direct settlement of such small claims. Approximately
30.0% of the number of total paid claims reported to Citizens during 1998,
1997 and 1996 were settled under this program.
Hanover and Citizens have increased usage of the managed care expertise of
the Allmerica Financial's Corporate Risk Management Services segment in the
analysis of medical services and pricing in the management of workers'
compensation and medical claims on its automobile policies. The Company
believes that this capability has reduced costs and provided more efficient
service to customers.
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Property and casualty insurers are subject to claims arising out of
catastrophes which may have a significant impact on their results of
operations and financial condition. The Property and Casualty segment may
experience catastrophe losses in the future which could have a material
adverse impact on the Company. Catastrophes can be caused by various events
including hurricanes, earthquakes, tornadoes, wind, hail, fires and
explosions, and the incidence and severity of catastrophes are inherently
unpredictable. Although catastrophes can cause losses in a variety of property
and casualty lines, homeowners and business property insurance have in the
past generated the vast majority of catastrophe-related claims.
Reserve for Unpaid Losses and Loss Adjustment Expenses
Reference is made to "Reserve for Losses and Loss Adjustment Expenses" on
pages 33, 34 and 35 of Management's Discussion and Analysis of Financial
Condition and Results of Operations of the 1998 Annual Report to Shareholders,
which is incorporated herein by reference.
The Company's actuaries, in the Property and Casualty segment, review the
reserves each quarter and certify the reserves annually as required for
statutory filings.
The Property and Casualty segment regularly reviews its reserving
techniques, its overall reserving position and its reinsurance. Based on (i)
review of historical data, legislative enactments, judicial decisions, legal
developments in impositions of damages, changes in political attitudes and
trends in general economic conditions, (ii) review of per claim information,
(iii) historical loss experience of the Property and Casualty segment and the
industry, (iv) the relatively short-term nature of most policies and (v)
internal estimates of required reserves, management believes that adequate
provision has been made for loss reserves. However, establishment of
appropriate reserves is an inherently uncertain process and there can be no
certainty that current established reserves will prove adequate in light of
subsequent actual experience. A significant change to the estimated reserves
could have a material impact on the results of operations.
Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to the Company and the Company's
payment of that loss. To recognize liabilities for unpaid losses, the Company
establishes reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and LAE.
The Company, in the Property and Casualty segment, does not use discounting
techniques in establishing reserves for losses and LAE, nor has it
participated in any loss portfolio transfers or other similar transactions.
The following table reconciles reserves determined in accordance with
accounting principles and practices prescribed or permitted by insurance
statutory authorities ("Statutory Reserve") to reserves determined in
accordance with generally accepted accounting principles ("GAAP Reserve") at
December 31, as follows:
1998 1997 1996
-------- -------- --------
(In millions)
Statutory reserve for losses and LAE........... $2,011.7 $2,047.2 $2,113.2
GAAP adjustments:
Reinsurance recoverable on unpaid losses..... 591.7 576.7 626.9
Other(*)..................................... (6.1) (8.5) 4.0
-------- -------- --------
GAAP reserve for losses and LAE................ $2,597.3 $2,615.4 $2,744.1
======== ======== ========
- --------
(*) Primarily represents other statutory liabilities reclassified as loss
adjustment expense reserves for GAAP reporting and purchase accounting
adjustments.
10
Analysis of Losses and Loss Adjustment Expenses Reserve Development
The following table sets forth the development of net reserves for unpaid
losses and LAE from 1988 through 1998 for the Company.
Year ended December 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(In millions)
Net reserve for
losses and
LAE(1)......... $2,005.5 $2,038.7 $2,117.2 $2,132.5 $2,109.3 $2,019.6 $1,936.9 $1,772.4 $1,550.6 $1,326.3 $1,150.9
Cumulative
amount paid as
of(2):
One year later.. -- 643.0 732.1 627.6 614.3 566.9 564.3 569.0 561.5 521.1 465.3
Two years
later.......... -- -- 1,054.3 1,008.3 940.7 884.4 862.7 888.0 874.5 820.2 725.3
Three years
later.......... -- -- -- 1,217.8 1,172.8 1,078.1 1,068.4 1,077.1 1,074.3 1,009.3 901.5
Four years
later.......... -- -- -- -- 1,300.4 1,210.9 1,184.1 1,207.1 1,186.4 1,130.1 1,009.7
Five years
later.......... -- -- -- -- -- 1,289.5 1,267.5 1,279.4 1,265.4 1,192.7 1,078.8
Six years
later.......... -- -- -- -- -- -- 1,323.1 1,337.2 1,314.2 1,240.9 1,116.2
Seven years
later.......... -- -- -- -- -- -- -- 1,377.3 1,355.3 1,271.4 1,147.4
Eight years
later.......... -- -- -- -- -- -- -- -- 1,385.9 1,301.6 1,170.4
Nine years
later.......... -- -- -- -- -- -- -- -- -- 1,324.0 1,192.5
Ten years
later.......... -- -- -- -- -- -- -- -- -- -- 1,209.8
Net reserve re-
estimated as
of(3):
End of year..... 2,005.5 2,038.7 2,117.2 2,132.5 2,109.3 2,019.6 1,936.9 1,772.4 1,550.6 1,326.3 1,150.9
One year later.. -- 1,911.5 1,989.3 1,991.1 1,971.7 1,891.5 1,868.1 1,755.0 1,601.5 1,412.4 1,220.4
Two years
later.......... -- -- 1,902.8 1,874.3 1,859.4 1,767.4 1,762.8 1,717.7 1,601.9 1,449.0 1,262.0
Three years
later.......... -- -- -- 1,826.8 1,780.3 1,691.5 1,703.3 1,670.8 1,614.3 1,471.7 1,290.2
Four years
later.......... -- -- -- -- 1,766.2 1,676.3 1,658.9 1,654.1 1,597.6 1,484.7 1,312.3
Five years
later.......... -- -- -- -- -- 1,653.7 1,637.3 1,634.6 1,594.3 1,482.3 1,322.1
Six years
later.......... -- -- -- -- -- -- 1,650.5 1,630.6 1,588.7 1,486.9 1,328.6
Seven years
later.......... -- -- -- -- -- -- -- 1,644.2 1,593.1 1,488.4 1,340.7
Eight years
later.......... -- -- -- -- -- -- -- -- 1,621.9 1,552.1 1,403.7
Nine years
later.......... -- -- -- -- -- -- -- -- -- 1,524.7 1,412.8
Ten years
later.......... -- -- -- -- -- -- -- -- -- -- 1,380.8
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Deficiency)
Redundancy,
net(4,5)....... $ -- $ 127.2 $ 214.4 $ 305.7 $ 343.1 $ 365.9 $ 286.4 $ 128.2 $ (71.3) $ (198.4) $ (229.9)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
- --------
(1) Sets forth the estimated net liability for unpaid losses and LAE recorded
at the balance sheet date for each of the indicated years; represents the
estimated amount of net losses and LAE for claims arising in the current
and all prior years that are unpaid at the balance sheet date, including
incurred but not reported ("IBNR") reserves.
(2) Cumulative loss and LAE payments made in succeeding years for losses
incurred prior to the balance sheet date.
(3) Re-estimated amount of the previously recorded liability based on
experience for each succeeding year; increased or decreased as payments
are made and more information becomes known about the severity of
remaining unpaid claims.
(4) Cumulative deficiency or redundancy at December 31, 1998 of the net
reserve amounts shown on the top line of the corresponding column. A
redundancy in reserves means the reserves established in prior years
exceeded actual losses and LAE or were reevaluated at less than the
original reserved amount. A deficiency in reserves means the reserves
established in prior years were less than actual losses and LAE or were
reevaluated at more than the original reserved amount.
(5) The following table sets forth the development of gross reserve for unpaid
losses and LAE from 1992 through 1998 for the Company:
11
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(In millions)
Reserve for losses and
LAE:
Gross liability........ $2,597.2 $2,615.4 $2,744.1 $2,896.0 $2,821.7 $2,717.3 $2,598.9
Reinsurance
recoverable........... 591.7 576.7 626.9 763.5 712.4 697.7 662.0
-------- -------- -------- -------- -------- -------- --------
Net liability.......... $2,005.5 $2,038.7 $2,117.2 $2,132.5 $2,109.3 $2,019.6 $1,936.9
======== ======== ======== ======== ======== ======== ========
One year later:
Gross re-estimated
liability............. $2,472.6 $2,541.9 $2,587.8 $2,593.5 $2,500.5 $2,460.5
Re-estimated
recoverable........... 561.1 552.6 596.7 621.8 609.0 592.4
-------- -------- -------- -------- -------- --------
Net re-estimated
liability............. $1,911.5 $1,989.3 $1,991.1 $1,971.7 $1,891.5 $1,868.1
======== ======== ======== ======== ======== ========
Two years later:
Gross re-estimated
liability............. $2,424.5 $2,427.7 $2,339.2 $2,333.3 $2,341.9
Re-estimated
recoverable........... 521.7 553.4 479.8 565.9 579.1
-------- -------- -------- -------- --------
Net re-estimated
liability............. $1,902.8 $1,874.3 $1,859.4 $1,767.4 $1,762.8
======== ======== ======== ======== ========
Three years later:
Gross re-estimated
liability............. $2,358.6 $2,227.0 $2,145.5 $2,257.3
Re-estimated
recoverable........... 531.8 446.7 454.0 554.0
-------- -------- -------- --------
Net re-estimated
liability............. $1,826.8 $1,780.3 $1,691.5 $1,703.3
======== ======== ======== ========
Four years later:
Gross re-estimated
liability............. $2,220.9 $2,102.0 $2,168.2
Re-estimated
recoverable........... 454.7 425.7 509.3
-------- -------- --------
Net re-estimated
liability............. $1,766.2 $1,676.3 $1,658.9
======== ======== ========
Five years later:
Gross re-estimated
liability............. $2,091.7 $2,027.3
Re-estimated
recoverable........... 438.0 390.0
-------- --------
Net re-estimated
liability............. $1,653.7 $1,637.3
======== ========
Six years later:
Gross re-estimated
liability............. $2,022.6
Re-estimated
recoverable........... 372.1
--------
Net re-estimated
liability............. $1,650.5
========
Reinsurance
The Company, in the Property and Casualty segment, maintains a reinsurance
program designed to protect against large or unusual losses and LAE activity.
This includes both excess of loss reinsurance and catastrophe reinsurance.
Catastrophe reinsurance serves to protect the ceding insurer from significant
aggregate losses arising from a single event such as windstorm, hail,
hurricane, tornado, riot or other extraordinary events. The Company determines
the appropriate amount of reinsurance based on the Company's evaluation of the
risks accepted and analyses prepared by consultants and reinsurers and on
market conditions including the availability and pricing of reinsurance. The
Company, in the Property and Casualty segment, has reinsurance for casualty
business.
Under the 1998 casualty reinsurance program, the reinsurers are responsible
for 100% of the amount of each loss in excess of $0.5 million per occurrence
up to $30.5 million for general liability and workers' compensation.
Additionally, this reinsurance covers workers' compensation losses in excess
of $30.5 million to $60.5 million per occurrence. Amounts in excess of $60.5
million in the workers' compensation line are retained 100% by the Company
while amounts in excess of $30.5 million in the general liability line are
retained by the Company.
Effective July 1, 1998, the Company maintained a property reinsurance
program in which the reinsurers are responsible for 100% of each loss in
excess of $0.5 million per occurrence up to $19.5 million for inland marine
and commercial auto physical damage. All other property business is 100%
covered by reinsurers for each loss in excess of $1.0 million per occurrence
up to $19.0 million.
Effective January 1, 1998, the Company, in the Property and Casualty
segment, modified its catastrophe reinsurance program to include a higher
retention. Under the 1998 catastrophe reinsurance program, the Company
12
retains $45.0 million of loss per occurrence, 10% of all aggregate loss
amounts in excess of $45.0 million up to $230.0 million and all amounts in
excess of $230.0 million. In 1998 and 1997, the Company, in the Property and
Casualty segment, recovered $3.0 million and $1.2 million on its catastrophe
coverage, respectively.
Effective January 1, 1999, the Company entered into a Whole Account
Aggregate Excess of Loss reinsurance agreement with a highly rated reinsurer.
The reinsurance agreement provides accident year coverage for the three years
1999 to 2001 for Allmerica P&C operations. The annual and aggregate limits on
this agreement are $150.0 million and $300.0 million, respectively. The
program covers losses and allocated LAE, including those incurred but not yet
reported, in excess of an agreed upon whole account loss and allocated LAE
ratio.
The Company, in the Property and Casualty segment, cedes to reinsurers a
portion of its risk and pays a fee based upon premiums received on all
policies subject to such reinsurance. Reinsurance contracts do not relieve the
Company from its obligations to policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company. The Company believes
that the terms of its reinsurance contracts are consistent with industry
practice in that they contain standard terms with respect to lines of business
covered, limit and retention, arbitration and occurrence. Based on its review
of its reinsurers' financial statements and reputations in the reinsurance
marketplace, the Company believes that its reinsurers are financially sound.
The Company, in the Property and Casualty segment, is subject to
concentration of risk with respect to reinsurance ceded to various residual
market mechanisms. As a condition to the ability to conduct certain business
in various states, the Company is required to participate in various residual
market mechanisms and pooling arrangements which provide various insurance
coverages to individuals or other entities that are otherwise unable to
purchase such coverage voluntarily provided by private insurers. These market
mechanisms and pooling arrangements include CAR and MCCA.
Reference is made to "Reinsurance" in Note 17 on pages 78 and 79 of the
Notes to Consolidated Financial Statements of the 1998 Annual Report to
Shareholders, which is incorporated herein by reference.
Reference is also made to "Reinsurance Facilities and Pools" on pages 6 and
7 of this Form 10-K which is incorporated herein by reference.
Corporate Risk Management Services
General
The Corporate Risk Management Services segment provides managed care medical
group insurance products and administrative services as well as other group
insurance coverages, such as group life, dental and disability products, to
corporate employers. As of December 31, 1998, this segment insured and/or
provided administrative services to the employee benefit plans of over 2,600
employers covering 615,199 employee lives. For the year ended December 31,
1998, this segment accounted for approximately $414.1 million, or 12.3%, of
consolidated segment revenues and income of $7.6 million, or 2.5%, of
consolidated segment income before taxes and minority interest.
The Company's strategy emphasizes risk sharing arrangements rather than
traditional indemnity medical insurance products. The Company's risk sharing
arrangements consist of providing stop-loss indemnity insurance coverage for
self-insured employers with 100 to 5,000 employees together with managed care
and administrative services for coverage provided by the employer and the
Company. This risk sharing approach enables the Company to provide more
managed care, administrative and other services with less exposure to losses
than traditional indemnity medical insurance. The Company also continues to
emphasize the sale of multiple product benefits packages, which include CRMS'
group life, dental and disability products, to these same employers. The
Company believes a multiple product benefits package provides greater
profitability for the Company due to increased price pressure relating to the
sale of single products. Additionally, due to the Company's strategy to
emphasize risk sharing arrangements rather than traditional indemnity medical
insurance products, the Company increased certain fully insured medical rates
during 1998.
13
In addition, the Company entered into an agreement with a highly rated
reinsurer to cede the underwriting losses of its accident and health assumed
reinsurance pool business, effective July 1, 1998. This reinsurance agreement
is consistent with the Company's restructuring initiative in its Corporate
Risk Management Services segment, whereby it announced its exit from the
accident and health assumed reinsurance pool business. Additionally, in 1998,
the Company decided to exit its administrative service only business as part
of its restructuring plan.
The Company continues to leverage the CRMS segment's managed care and claims
management expertise to capitalize on opportunities with its Property and
Casualty segment affiliates. Legislation in many states permits the cost
containment approaches that have been used to manage employee medical and
disability costs to be applied to control workers' compensation and the
medical component of automobile insurance. In response, the Company has
utilized CRMS' expertise in medical management and claims processing for its
Property and Casualty segment's workers' compensation business and the medical
component of its automobile insurance business. Health care and other claims
professionals ensure that appropriate medical care is provided to insureds and
that bills from health care providers are reasonable. This integrated managed
care and claims adjudication system now manages medical claims covered by
workers' compensation, automobile insurance and health benefit plans. The
Company believes that its capability of providing 24-hour managed care to
effectively manage claims for both casualty and health benefit products can
result in reduced costs and serve its customers more efficiently.
In addition, the Company is focused on the continued development of its
integrated benefits products MedCompONE and Integrated DisabilityONE.
MedCompONE integrates workers' compensation coverage with group medical
coverage. Group disability coverage, both short term and long term, can also
be included. Integrated DisabilityONE integrates workers' compensation
coverage with group disability coverage. The integrated services that are
provided to employers include claims management and processing, account
management, administrative services, and underwriting. The Company believes
these products provide customers ease of administration, as well as cost
savings due to their interaction with only one carrier. Integrated claims
management, including return to work management of all disability claims,
helps employers contain the cost of claims, claims handling and claims
management services provided to employers through its MedCompONE product. Both
MedCompONE and Integrated DisabilityONE are totally integrated claim
management and plan administration programs designed to minimize the overall
costs of occupational and non-occupational illness and injury.
Health Care Regulation and Reform
There continue to be a number of legislative and regulatory proposals
introduced at the federal and state level to reform the current health care
system. At the federal level, recent proposals have focused on managed care
reform, and patient protection and advocacy. State and federal legislation
adopted over the past few years generally limits the flexibility of insurers
with respect to underwriting practices for small employer plans that contain
less than 50 employees, provides for crediting previous coverage for the
purposes of determining pre-existing conditions, and limits the ability to
medically underwrite individual risks in the group market. In addition,
several states have enacted managed care reform legislation which may change
managed care programs. While future legislative activity is unknown, it is
probable that limitations on insurers that utilize managed care programs or
market health insurance to small employers will continue. However, the
Company's rating, underwriting practices, and managed care programs are
consistent with the objectives of current reform initiatives. For example, the
Company does not experience rate small cases, nor does it refuse coverage to
eligible individuals because of medical histories. Also, its managed care
programs provide for coverage outside of the preferred network and allow for
open communication between a doctor and his/her patient. Because of its
emphasis on managed care and risk sharing partnerships, management believes
that it will continue to be able to operate effectively in the event of
further reform, even if specific states expand the existing limitations.
The Company believes that the proposed federal and state health care reforms
would, if enacted, substantially expand access to and mandate the amounts of
health care coverage while limiting or eliminating insurer's flexibility and
restrict the profitability of health insurers and managed care providers. The
Company
14
cannot predict whether any of the current proposals will be enacted or assess
the particular impact such proposals may have on the Company's Corporate Risk
Management Services' business.
Products
The following table summarizes premiums by product line for the CRMS segment
for the years ended December 31.
1998 1997 1996
-------- ------ ------
(In millions)
Health
Medical
Fully insured.................................... $ 35.2 $ 41.9 $ 40.6
Risk sharing..................................... 82.9 81.1 83.2
Dental
Fully insured.................................... 24.6 30.0 21.3
Risk sharing..................................... 2.6 2.4 2.7
Short-term disability
Fully insured.................................... 6.8 6.8 6.5
Risk sharing..................................... 0.3 0.3 0.5
Long-term disability
Fully insured.................................... 9.3 9.2 8.5
Reinsurance assumed (1).............................. 71.7 69.3 57.5
Stop loss (2)........................................ 38.8 31.0 26.4
-------- ------ ------
Total health......................................... 272.2 272.0 247.2
Accidental death & dismemberment..................... 5.5 5.3 5.0
Other reinsurance assumed............................ 4.2 5.5 0.4
Life................................................. 54.1 50.2 50.3
-------- ------ ------
Total CRMS premiums.................................. $ 336.0 $333.0 $302.9
======== ====== ======
ASO (3).............................................. $ 33.7 $ 27.6 $ 23.8
======== ====== ======
Total premiums and premium equivalents............... $1,020.0 $936.6 $884.3
======== ====== ======
- --------
(1) Represents special risk arrangements whereby the Company assumes a limited
amount of risk by participating in a pool administered by a third party.
Such arrangements provide insurance coverage to companies for certain high
limit and excess loss risks. In 1998, the Company has exited substantially
all of these special risk arrangements by reinsuring the underwriting
losses from this business.
(2) Represents premiums primarily related to customized products sold to
customers providing for stop loss coverage only or in conjunction with
administrative services.
(3) Administrative services only ("ASO") fees are included in other income in
the financial information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the Annual
Report to Shareholders, which is incorporated herein by reference. In
1998, the Company decided to exit its administrative service only business
as part of its restructuring plan.
Risk Sharing Arrangements
The Company participates in risk sharing arrangements primarily for medical,
dental and short-term disability coverage. In accordance with its strategy to
emphasize risk sharing arrangements with its customers, the Company offers
several funding options that allow employers to share in the risk of their
plan. Partially self funded plans provide employers with a self-insured
arrangement in which the Company provides claims administration and other
services selected by the employer. In addition, the Company provides specific
and aggregate stop-loss insurance coverage for these plans. The Company also
provides minimum premium arrangements for its insured plans.
15
Other Group Coverage
The Company's group life, accidental death and dismemberment ("AD&D"),
disability and dental products are offered in conjunction with medical
insurance coverages or as stand alone products. The Company offers features in
its group life insurance which include fixed or variable pricing, or
traditional and supplemental contributory group term life insurance. AD&D
insurance may be included with group term life insurance to pay additional
amounts for losses due to an accident. The Company offers weekly disability
income insurance to cover employees for loss of wages during a short period of
disability, long term disability insurance either with weekly coverage or on a
stand-alone basis and dental insurance for preventive and diagnostic services,
routine restorative services and major restorative services.
Special Risk Arrangements
The Company has decided to exit the special risk market through a
reinsurance agreement which cedes the underwriting losses related to this
business. Special risk arrangements provided for a limited share of the risk
to be taken through reinsurance pools. These programs provided a variety of
insurance coverages, including high limit AD&D, high limit disability income,
excess loss medical reinsurance for self-funded plans, organ transplant,
occupational accident and travel accident.
Traditional Products
The Company offers full indemnity products for medical, surgical and
hospital expense coverage resulting from illness or injury. Many options are
available for deductible amounts and coinsurance levels.
Marketing
The Company sells its CRMS segment's products and services primarily through
approximately 30 sales representatives employed by the Company. These
representatives assist independent producers (for example, agents, brokers and
consultants who represent the purchasers of the Company's products) in the
marketing of these products, and provide assistance with plan design issues
and ongoing service.
Reinsurance
The Company purchases reinsurance for the CRMS segment's group life
insurance, AD&D, group health, stop-loss and occupational accident coverages.
The Company retains a maximum exposure of $500,000 on life policies and
$250,000 on AD&D policies. The Company also has reinsurance arrangements to
further limit the Company's liability with respect to policies for certain
employers and groups. Although reinsurance does not legally discharge the
ceding insurer from its primary liability for the full amount of policies
reinsured, it does make the assuming insurer liable to the ceding insurer to
the extent of the reinsurance ceded. The Company maintains a gross reserve for
reinsured liabilities.
The Company participates in a catastrophic reinsurance pool for this segment
for coverage against catastrophic life losses from the same event. Under the
pool arrangement, the Company shares in approximately 3.2% of the pool's
losses. The Company purchases reinsurance which limits the Company's share of
annual pool claim losses to $500,000.
With respect to this segment's group health policies, the Company purchases
specific stop-loss coverage for individual major medical claims over $350,000
once such excess claims exceed a minimum aggregate limit of $3.7 million. The
Company also purchases catastrophic coverage for three or more claims arising
from the same event. Under this coverage the Company is reimbursed for medical
and long term disability claims paid in excess of $500,000 in total as a
result of the event. The Company purchases reinsurance protection for
substantially all of its long term disability payments, covering a specific
percent, which generally approximates 50%, of each long term disability
policy. Effective October 1, 1998, the Company purchased reinsurance on the
16
MedCompONE block of business. Under this coverage, the Company is reimbursed
50% for all combined claims up to $500,000 with additional excess coverage for
claims over $500,000.
The Company writes a specific and aggregate stop loss product on business
underwritten and administered by certain third parties. The risk associated
with these plans is ceded to a group of reinsurers, including FAFLIC, who
share in the risk assumed. The Company also assumes risk from a number of
other pools that cover stop loss, occupational accident, long term care, and
long term disability insurance. As part of the strategy of exiting the
accident and health assumed reinsurance pool business, the Company entered
into an agreement that cedes the underwriting loss from this business from
July 1, 1998 to December 31, 2000 up to an aggregate of $40.0 million. Due to
the nature of this business, the run-off related to this block could continue
beyond the termination of this reinsurance agreement.
For the year ended December 31, 1998, the Company ceded approximately $91.9
million of premiums associated with its aggregate stop loss policies and
approximately $11.1 million of premiums for the remaining direct insurance
coverages. As of December 31, 1998, the Company had $29.6 million due from
reinsurers.
Competition
The Company competes with many insurance companies and other entities in
selling its CRMS products. Competition exists for employer groups, for the
employees who are the ultimate consumers of the Company's products sold
through the CRMS segment and for the independent producers who represent
purchasers of the Company's products. Additionally, most currently insured
employer groups receive annual rate adjustments, and employers may seek
competitive quotations from several sources prior to renewal.
The Company competes primarily with national and regional health insurance
companies and other managed care providers. Many of the Company's competitors
have greater capital resources, local market presence and greater name
recognition than the Company. The Company also competes with Blue Cross and
Blue Shield plans, which in some markets have dominant market share. Most Blue
Cross and Blue Shield plans are non-profit enterprises that do not necessarily
pursue profitability to the same extent as for-profit competitors do. The
Company also competes with HMOs, some of which are non-profit enterprises. In
addition, in its risk sharing and administrative service businesses, the
Company also competes with TPAs.
The Company is taking advantage of its capabilities as a multi-line insurer
to offer employers in the middle market (200 employees to 5,000 employees) an
integrated solution to their workers' compensation, group medical and group
disability programs. The majority of other carriers and TPAs in the integrated
marketplace are offering only group disability with workers' compensation. The
Company believes it is well-positioned to deliver workers' compensation, group
disability and group medical on an integrated basis, which provides the
Company with a competitive advantage.
The Company believes, based upon its knowledge of the market, that in the
current environment, the principal competitive factors in the sale of managed
care medical products are price, breadth of managed care network arrangements,
name recognition, technology and management information systems, distribution
systems, quality of customer service, product line flexibility and variety,
and financial stability. As a result, the Company believes that its managed
care expertise, access to managed care networks, commitment to claims
management and customer service, and its advanced claims management and
information systems enable it to compete effectively in these markets.
Although the Company cannot predict the effect of current federal and state
health care reform proposals, the Company believes that such reform measures
may increase competition in the sale of health care products by limiting the
ability of the Company's customers to purchase health care coverage from a
wide variety of health care providers and insurers, by mandating participation
by insurers in regional health care alliances or pools and by limiting rating
and underwriting practices.
17
Retirement and Asset Accumulation
Allmerica Financial Services
General
The Allmerica Financial Services segment includes the individual financial
products and the group retirement products and services businesses of FAFLIC
and its wholly-owned subsidiary, AFLIAC, as well as the Company's registered
investment advisor and broker-dealer affiliates. Through this segment, the
Company is a leading provider of investment-oriented life insurance and
annuities to upper income individuals and small businesses throughout the
United States. These products are marketed through the Company's career agency
force of 603 agents, to mutual fund providers for their variable annuity
customers, and on a wholesale basis to financial planners and broker-dealers.
For the year ended December 31, 1998, the Allmerica Financial Services segment
accounted for $625.6 million, or 18.6%, of consolidated segment revenues and
$166.7 million, or 55.8%, of consolidated segment income before taxes and
minority interest.
The Company offers a diverse line of products tailored to its customer
market, including variable annuities, variable universal life, group
retirement plan products, retirement plan funding products and universal life.
The main components of the Company's current strategy in this segment are to:
(i) emphasize investment-oriented insurance products, particularly variable
annuities and variable universal life insurance, (ii) continue to develop
alternative distribution channels, (iii) leverage the Company's technological
resources to support marketing and client service initiatives, (iv) improve
the productivity of the career agency distribution system and (v) implement a
targeted marketing approach emphasizing value-added service. Prior to 1998,
the group retirement plan products were offered through the Company's
Institutional Services segment.
Throughout 1998, a significant distribution system in this segment is the
career agent sales force. Virtually all of the Company's career agents are
registered broker-dealer representatives, licensed to sell all of Allmerica
Financial Services investment products, as well as its insurance products. The
Company has implemented a performance-based compensation system which rewards
agents and agencies based upon sales of products which provide greater profits
for the Company. The Company has also instituted higher performance standards
for agency retention, and requires that such standards be achieved earlier, in
order to elevate the productivity of its agent sales force.
In addition to its agency distribution system, the Company has established
several other distribution channels, which have made significant contributions
to the overall growth of variable product sales in this segment. Products sold
through these channels include Allmerica Select life and annuity products,
which are distributed through independent broker-dealers and financial
planners, as well as annuity products sold through alliances with mutual fund
partners such as Delaware Group ("Delaware"), Pioneer Group ("Pioneer"),
Zurich Kemper Investments ("Kemper") and Fulcrum Trust ("Fulcrum"). New
deposits from additional distribution channels have grown from 46.5% of
statutory annuity premiums and deposits in 1996 to 72.3% in 1998. The
Company's strategy is to pursue additional distribution channels and to seek
to increase sales under its existing distribution channels.
The Company has developed a number of new marketing and client service
initiatives in order to encourage sales of its products and improve customer
satisfaction. As part of its focus on the sale of investment-oriented
insurance products, the Company has emphasized a financial planning approach
utilizing face-to-face presentations and seminar programs to address different
client needs. In order to identify a favorable prospective client base, the
Company has developed a system utilizing advanced demographic screening and
telemarketing techniques. The Company also regularly delivers seminars focused
on retirement planning to these prospective clients. During 1998, the Company
delivered approximately 600 seminars nationally with an average of more than
50 attendees.
The Company has also utilized its technological resources to support its
marketing and client service initiatives in this segment. The Company has
developed automated portfolio re-balancing capabilities and
18
graphical quarterly report statements, which are used to establish and monitor
the desired mix of investments by individual contract and policyholders.
According to 1998 A.M. Best's Policy Reports, the Company is among the ten
largest writers of individual variable annuity contracts and individual
variable universal life insurance policies in the United States in 1997, based
on statutory premiums and deposits. Sales of variable products represented
approximately 98.0%, 95.7% and 91.8% of this segment's statutory premiums and
deposits in 1998, 1997 and 1996, respectively. Statutory premiums and
deposits, a common industry benchmark for sales achievement, totaled $4,101.9
million, $3,188.8 million and $2,036.5 million in 1998, 1997 and 1996,
respectively.
Currently, under the Internal Revenue Code, holders of certain life
insurance and annuity products are entitled to tax-favored treatment on these
products. For example, income tax payable by policyholders on investment
earnings under certain life insurance and annuity products is deferred during
the product's accumulation period and is payable, if at all, only when the
insurance or annuity benefits are actually paid or to be paid. Also, for
example, interest on loans up to $50,000 secured by the cash value of certain
insurance policies owned by businesses is eligible for deduction even though
investment earnings during the accumulation period are tax-deferred.
In the past, legislation has been proposed that would have curtailed the
tax-favored treatment of the life insurance and annuity products offered by
the Company. These proposals were not enacted; however, such proposals or
similar proposals are currently under consideration by Congress. If these or
similar proposals directed at limiting the tax-favored treatment of life
insurance policies and annuity contracts were enacted, market demand for such
products offered by the Company would be adversely affected. The Company
cannot predict the impact of such effects.
Products
The following table reflects premiums and deposits on a statutory accounting
practices ("SAP") basis, including universal life and investment-oriented
contract deposits, for the segment's major product lines, including the Closed
Block, for the years ended December 31, 1998, 1997 and 1996. Receipts from
various products are treated differently under GAAP and SAP. Under GAAP,
universal life, variable universal life and annuity deposits are not included
in revenues but are recorded directly to policyholder account balances.
1998 1997 1996
-------- -------- --------
(In millions)
Statutory Premiums and Deposits
Variable universal life........................ $ 158.7 $ 148.8 $ 117.2
Group variable universal life.................. 73.3 68.3 7.4
Separate account annuities..................... 2,585.9 2,186.1 1,160.9
General account annuities (1).................. 622.2 234.7 147.9
Retirement investment account annuities........ 20.1 21.8 24.5
Group annuities................................ 561.6 387.2 412.2
Universal life................................. 23.6 60.7 71.6
Traditional life............................... 55.9 58.4 61.9
Individual health.............................. 0.6 22.8 32.9
-------- -------- --------
Total statutory premiums and deposits........ $4,101.9 $3,188.8 $2,036.5
======== ======== ========
- --------
(1) The general account includes approximately $373.0 million of deposits made
in conjunction with the introduction of a new annuity program which
provides, for a limited time, enhanced crediting rates on deposits made
into the Company's general account. Under this program, the funds are then
transferred ratably, over a limited period of time, into the Company's
separate account investments.
19
While the Company continues to offer certain traditional insurance products,
its current focus for new business in this segment is on the sale of variable
products.
Variable Products
The Company's variable products offered through this segment include
variable universal life insurance and variable annuities. The Company's
variable universal life insurance products combine the flexible terms of the
Company's universal life insurance policy with separate account investment
opportunities. The Company also offers a variable joint life product through
this segment. The Company's variable annuities offer the investment
opportunities of the Company's separate accounts and provide a vehicle for
tax-deferred savings. These products are sold pursuant to registration
statements under the Securities Act or exemptions from registration
thereunder.
The Company seeks to achieve product distinction with respect to its
variable products on the basis of quality and diversity of the separate
account investment options underlying these products. The Company's variable
universal life and annuity products offer a variety of account investment
options with choices ranging from money market funds to international equity
funds. The number of these investment options has increased from 60 in 1996 to
98 in 1998, including those underlying the products sold through alternative
distribution channels. For management of these separate accounts, the Company
supplements its in-house expertise in managing fixed income assets with the
equity management expertise of well-known mutual fund advisors, such as
Fidelity Investments, as well as other independent management firms who
specialize in the management of institutional assets. Additionally, the
Company utilizes the services of an experienced investment consultant to the
pension industry to assist it in the selection of these institutional managers
and in the ongoing monitoring of their performance.
Retirement Products
In addition to the above, the Company provides consulting and investment
services to defined benefit and defined contribution retirement plans of
corporate employers, as well as the sale of group annuities to corporate
pension plans. The Company also offers participant recordkeeping and
administrative services to defined benefit and defined contribution retirement
plans. Participants in defined contribution plans serviced by the Company have
the option to invest their contributions to the plan in the Company's general
account or choose from one of the Company's separate account investment
options. Currently, the Company provides administration and recordkeeping for
approximately 530 qualified pension and profit sharing plans, which have
assets totaling $1.8 billion, and cover approximately 77,000 participants. To
address the decrease in the market for defined benefit plans sponsored by
employers, the Company has focused on increasing sales of defined contribution
plans, targeting plans with less than 500 participants. Based on internal
studies, management believes the size of this market provides the greatest
opportunity in this line of business.
Traditional Products
The Company's primary insurance products contained in this segment are
traditional life insurance products, including whole life and universal life,
as well as fixed annuities and retirement plan funding products.
The Company's universal life insurance product is an interest-sensitive
product which offers flexibility in arranging the amount of insurance
coverage, the premium level and the premium payment period. The Company also
offers joint life products through this segment designed to meet estate
planning needs. These products offer flexible premiums and benefits and cover
two lives, with benefits paid at the first or second death, depending on the
policy. In addition, the Company offers a funding vehicle for pension plans of
small to medium-sized employers which provides both general account and
separate account investment options.
20
Distribution
A significant distribution channel for this segment is its national career
agency sales force of 603 agents, housed in 19 general agencies located in or
adjacent to most of the major metropolitan centers in the United States.
Virtually all of these agents are licensed both as insurance agents and
securities broker-dealers by the National Association of Securities Dealers
("NASD"), qualifying them to sell the full range of the Company's products.
The Company has focused on improving the productivity and reducing the cost of
its career agency system through performance-based compensation, higher
performance standards for agency retention and agency training programs. The
Company also regularly conducts comprehensive financial planning seminars and
face-to-face presentations to address different investment objectives of
clients. During 1998, total statutory premiums and deposits from sales of
variable annuities through the agency sales force totaled $871.3 million,
compared to $782.2 million in 1997.
The Company has established several distribution channels for this segment's
products utilizing independent broker-dealers and financial planners. Through
these distribution channels, the Company has obtained access to over 400
distribution firms employing over 55,000 sales personnel. In addition,
establishment of these channels has enabled the Company to offer a broader
range of investment options through alliances with Delaware, Pioneer, Kemper
and Fulcrum mutual funds. During 1998, total statutory premiums and deposits
from sales of variable annuities through additional distribution channels
totaled $2,334.5 million, compared to $1,621.6 million in 1997.
Additionally, the Company offers its group retirement products for sale
directly at the worksite through trained and licensed sales representatives.
In addition to the Home Office, the Company maintains seven regional sales and
service offices located in strategic financial markets. By using education and
personalized consulting to increase employee purchases, the Company seeks to
lower acquisition costs and increase employee participation levels.
Underwriting
Life insurance underwriting involves a determination of the type and amount
of risk which an insurer is willing to accept and the price charged to do so.
The Company's insurance underwriting standards for this segment attempt to
produce mortality results consistent with the assumptions used in product
pricing. Underwriting also determines the amount and type of reinsurance
levels appropriate for a particular risk profile and thereby allows
competitive risk selection. Underwriting rules and guidelines are based on the
mortality experience of the Company, as well as of the insurance industry and
the general population. The Company also uses a variety of medical tests to
evaluate certain policy applications, based on the size of the policy, the age
of the applicant and other factors.
The Company's product specifications are designed to prevent anti-selection.
Mortality assumptions are thoroughly communicated and monitored. The
underwriting department tracks the profitability indicators of business by
each general agent, including the mix of business, percentage of substandard
and declined cases and placement ratio. Ongoing internal underwriting audits,
conducted at multiple levels, monitor consistency of underwriting requirements
and philosophy. Routine independent underwriting audits conducted by its
reinsurers have supported the Company's underwriting policies and procedures.
Insurance Reserves
The Company has established liabilities for policyholders' account balances
and future policy benefits in the consolidated balance sheets included in the
1998 Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference, to meet obligations on various policies and
contracts. Policyholders' account balances for universal life and investment-
type policies are equal to cumulative account balances: deposits plus credited
interest, less expense and mortality charges and withdrawals. Future policy
benefits for traditional products are computed on the basis of assumed
investment yields, mortality, persistency, morbidity
21
and expenses (including a margin for adverse deviation), which are established
at the time of issuance of a policy and generally vary by product, year of
issue and policy duration.
Reinsurance
Consistent with the general practice in the life insurance industry, the
Company has reinsured portions of the coverage provided by this segment's
insurance products with other insurance companies. Insurance is ceded
principally to reduce net liability on individual risks, to provide protection
against large losses and to obtain a greater diversification of risk. Although
reinsurance does not legally discharge the ceding insurer from its primary
liability for the full amount of policies reinsured, it does make the
reinsurers liable to the insurer to the extent of the reinsurance ceded. The
Company maintains a gross reserve for reinsurance liabilities. The Company
ceded approximately 3.1% of this segment's total statutory life insurance
premiums in 1998.
With respect to life policies of the Allmerica Financial Services segment,
the Company has reinsurance agreements in place, established on an annual
term, for both automatic and facultative reinsurance. Under automatic
reinsurance, the reinsurer is automatically bound for up to three times the
Company's retention, which currently is $2.0 million per life, with certain
restrictions that determine the binding authority with the various reinsurers.
For life policies greater than $8.0 million, the Company obtains facultative
reinsurance. Prior to issuing facultative reinsurance, the facultative
reinsurer reviews all of the underwriting information relating to the policies
and reinsures on a policy by policy basis. Depending on the nature of the risk
and the size of the policy, the facultative reinsurance could be provided by
one company or several. The Company sometimes facultatively reinsures certain
policies under $2.0 million which do not satisfy the Company's underwriting
guidelines.
The Company seeks to enter into reinsurance treaties with highly rated
reinsurers. All of the reinsurers utilized by this segment have received an
A.M. Best rating of "A- (Excellent)" or better (Best's Insurance Reports, 1998
edition). The Company believes that it has established appropriate reinsurance
coverage for this segment based upon its net retained insured liabilities
compared to its surplus. Based on its review of its reinsurers' financial
positions and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The Company also obtains catastrophe reinsurance for life insurance in this
segment through a catastrophe accident pool. The maximum pool reinsurance
available per company is $50.0 million and the maximum pool reinsurance
available for a single event is $125.0 million. Any amounts in excess of these
limits are the responsibility of the company suffering the loss. Each
participant in the pool pays a premium based on the share of claims paid by
the pool. The Company's share of pool losses is approximately 2.5%. There have
been three claims for which the Company's share was approximately $80,000
since the Company entered the pool on January 1, 1989. Approximately 125
companies currently participate in this pool.
Effective January 1, 1998, the Company entered into an agreement with a
highly rated reinsurer to reinsure the mortality risk on the universal life
and variable universal life lines of business. Management believes that this
agreement will continue to have an immaterial effect on the results of
operations and financial position of the Company. In addition, during 1997,
the Company entered into a 100% coinsurance agreement to reinsure
substantially all of its individual disability income business.
Competition
There is strong competition among insurance companies seeking clients for
the types of insurance, annuities and investment products sold by the Company
in this segment. As of December 31, 1998, there were approximately 1,500
companies that offer life insurance in the United States, most of which offer
one or more products similar to those offered by the Company. In some cases
these products are offered through similar marketing techniques. In addition,
the Company may face additional competition from banks and other financial
22
institutions should current regulatory restrictions on the sale of insurance
and securities by these institutions be repealed.
The Company believes that, based upon its extensive experience in the
market, the principal competitive factors affecting the sale of its life
insurance and related investment products are price, financial strength and
claims-paying ratings, size and strength of agency force, range of product
lines, product quality, reputation and name recognition, value-added service
and, with respect to variable insurance and annuity products, investment
management performance of the underlying separate accounts. Accordingly,
management believes that the Company's strong financial strength and claims-
paying ratings, the quality and diversity of the separate accounts underlying
its investment-based products, the NASD licensing of substantially all of its
agents and its reputation in the insurance industry enable it to compete
effectively in the markets in which it operates.
Allmerica Asset Management
General
Through the Allmerica Asset Management segment, the Company offers Stable
Value Products, such as Guaranteed Interest Contracts (GICs), to ERISA-
qualified retirement plans as well as other non-ERISA institutional buyers,
such as money market funds, corporate cash management programs and securities
lending collateral programs. In addition, this segment contains a Registered
Investment Advisor, which provides investment advisory services to affiliates
and to other institutions, such as insurance companies, retirement plans and
mutual funds.
Prior to 1998, the Company offered GICs through its Institutional Services
segment in FAFLIC, primarily to ERISA-qualified defined contribution and
defined benefit retirement plans. In 1998, management of these products was
transferred to Allmerica Asset Management, though the issuance of GICs
continues to be through FAFLIC. In 1997, the Company began offering floating
rate GICs, a specific type of GIC designed for non-ERISA institutional buyers,
such as money market funds, corporate cash management programs and securities
lending collateral programs.
For the year ended December 31, 1998, this segment accounted for
approximately $121.7 million, or 3.6%, of consolidated segment revenues, and
income of $23.7 million, or 7.9%, of consolidated segment income before taxes
and minority interest.
Products and Services
Stable Value Products
Three types of Stable Value Products are offered: the traditional GIC, the
synthetic GIC, and the non-qualified GIC, often referred to as "Funding
Agreements" or "floating rate GICs". The traditional GIC is issued to ERISA-
qualified retirement plans, and provides a fixed guaranteed interest rate and
fixed maturity for each contract. Some of the traditional GICs provide for a
specific lump sum deposit and no withdrawals prior to maturity. Other
traditional GICs allow for window deposits and/or benefit-sensitive
withdrawals prior to maturity, for which the Company builds an additional risk
charge into the guaranteed interest rate. The synthetic GIC is similar to the
traditional GIC, except that the underlying investments are generally held and
managed by a third party, in accordance with specific investment guidelines,
and the Company periodically resets the guaranteed interest rate for in-force
funds, based on the actual investment experience of the funds. The floating
rate GIC is similar to the traditional GIC, except that it is issued to non-
ERISA institutional buyers, such as money market funds, corporate cash
management programs and securities lending collateral programs. This market
tends to prefer short duration instruments, so it is typical for the floating
rate GIC to have short maturities and periodic interest rate resets, based on
an index such as LIBOR.
23
During 1998, total traditional GIC sales were less than $10.0 million and
floating rate GIC sales were approximately $1.1 billion, up from $250.0
million in 1997. There were no sales of synthetic GICs. The continued low
volume of traditional and synthetic GIC sales reflects the Company's decision
to sell these products only when the profit margins meet the Company's
standards. The Company expects to continue its sales of floating rate GICs in
1999.
Investment Advisory Services
Through its registered investment advisor, Allmerica Asset Management, Inc.,
the Company provides investment advisory services to affiliates and to other
institutions, including unaffiliated insurance companies, retirement plans,
foundations and mutual funds. At December 31, 1998, Allmerica Asset Management
had assets under management of approximately $13.2 billion, of which
approximately $1.4 billion represented assets managed for third party clients
(i.e. entities unaffiliated with the Company). Assets under management for
third party clients grew by over $1.0 billion during 1998.
Distribution
The Company distributes Stable Value Products through brokers, GIC
investment managers and directly from the Home Office. Investment advisory
services are marketed directly.
Competition
Prior to 1995, all GIC sales consisted of traditional GICs. Around that
time, increased sensitivity to claims-paying ratings of GIC issuers, a
reduction in the amount of new funds allocated to the purchase of GICs in
general, and an increase in availability of non-traditional GIC alternatives,
resulted in an increasingly difficult market in which to sell traditional
GICs. At that time, the Company introduced its synthetic GIC, selling about
$110.0 million of this product in the first year. Since then, increased
competition in the synthetic GIC market has driven margins on new business
down to extremely low levels.
The Company introduced its floating rate GIC product in the latter part of
1997. There are approximately two dozen insurance companies that compete in
the floating rate GIC market. Floating rate GICs are one of a variety of
instruments being purchased by the buyers in this market, and the Company
views these other instruments as comprising the primary competition. Short-
term commercial paper issued by corporations is the most common of these
competing instruments. The primary factors affecting the ability to sell are
the yields offered, short term ratings (and to a lesser extent, claims paying
ratings) and product structure. With its expertise in asset/liability
management, the Company is able to offer yields that are very competitive with
comparably rated instruments, and a variety of product structures, while
earning an attractive return on capital, with low volatility.
Investment Portfolio
General
At December 31, 1998, the Company held $10.4 billion of investment assets,
including $770.5 million of investment assets in the Closed Block. These
investments are generally of high quality and broadly diversified across asset
classes and individual investment risks. The major categories of investment
assets are: fixed maturities, which includes both investment grade and below
investment grade public and private debt securities; equity securities;
mortgage loans, principally on commercial properties; real estate, which
consists primarily of investments in commercial properties; policy loans and
other long-term investments. The remainder of the investment assets is
comprised of cash and cash equivalents.
Management has an integrated approach to developing an investment strategy
for the Company that maximizes income, while incorporating overall asset
allocation, business segment objectives, and asset/liability
24
management tailored to specific insurance or investment product requirements.
The Company's integrated approach and the execution of the investment strategy
are founded upon a value orientation. The Company's investment professionals
seek to identify undervalued securities in the markets through extensive
fundamental research and credit analysis. Management believes this research-
driven, value orientation is a key to achieving the overall investment
objectives of producing superior rates of return, preserving capital and
meeting the financial goals of the Company's business segments.
The appropriate asset allocation for the Company (the selection of broad
investment categories such as fixed maturities, equity securities, mortgages
and real estate) is determined by management initially through a process that
focuses overall on the types of businesses in each segment that the Company
engages in and the level of surplus (net worth) required to support these
businesses.
At the segment level, the Company has developed an asset/liability
management approach tailored to specific insurance, investment product and
income objectives. The investment assets of the Company are then managed in
over 20 portfolio segments consistent with specific products or groups of
products having similar liability characteristics. As part of this approach,
management develops investment guidelines for each portfolio consistent with
the return objectives, risk tolerance, liquidity, time horizon, tax and
regulatory requirements of the related product or business segment. Specific
investments frequently meet the requirements of, and are acquired by, more
than one investment portfolio (or investment segment of the general account of
FAFLIC or AFLIAC, with each investment segment holding a pro rata interest in
such investments and the cash flows therefrom). Management has a general
policy of diversifying investments both within and across all portfolios. The
Company monitors the credit quality of its investments and its exposure to
individual borrowers, industries, sectors and, in the case of mortgages and
real estate, property types and geographic locations. In 1998, management
continued its strategy of shifting portfolio holdings from equity securities
to higher quality fixed maturity securities, as well as decreasing overall
investment exposure in certain limited partnership investments, to meet income
objectives. All investments held by the Company's insurance subsidiaries are
subject to diversification requirements under insurance laws.
Consistent with this management approach, portfolio managers maintain close
working relationships with the managers of related product lines within the
Property and Casualty, Corporate Risk Management Services, Allmerica Financial
Services and Allmerica Asset Management segments. Changes in the outlook for
investment markets or the returns generated by portfolio holdings are
reflected as appropriate on a timely basis in the pricing of the Company's
products and services.
Rating Agencies
Insurance companies are rated by rating agencies to provide both industry
and participants and insurance consumers meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and
a stronger ability to pay claims.
FAFLIC, AFLIAC, Hanover and Citizens all received an A.M. Best financial
condition rating of A (Excellent) in 1998.
FAFLIC and AFLIAC were given Duff & Phelps claims-paying ability ratings of
AA (Very High) in May 1998.
FAFLIC, AFLIAC and Hanover were given Moody's financial strength ratings of
A1 (Good) in December 1998.
FAFLIC, AFLIAC and Hanover, together with its subsidiaries, including
Citizens Insurance, were given S&P claims-paying ability rating of AA-
(Excellent) as of March 10, 1999.
25
Management believes that its strong ratings are important factors in
marketing the products of its insurance companies to its agents and customers,
since rating information is broadly disseminated and generally used throughout
the industry. Insurance company ratings are assigned to an insurer based upon
factors relevant to policyholders and are not directed toward protection of
investors. Such ratings are neither a rating of securities nor a
recommendation to buy, hold or sell any security.
Employees
The Company has approximately 6,300 employees located throughout the
country. Management believes relations with employees and agents are good.
ITEM 2
PROPERTIES
The Company's headquarters are located at 440 Lincoln Street, Worcester,
Massachusetts, and consist primarily of approximately 758,000 rentable square
feet of office and conference space owned in fee and include the headquarters
of Hanover.
Citizens owns its home office, located at 645 W. Grand River, Howell,
Michigan, which is approximately 127,000 rentable square feet. Citizens also
owns a three-building complex located at 808 North Highlander Way, Howell,
Michigan, with approximately 209,000 rentable square feet, where various
business operations are conducted.
The Company leases office space for its sales force throughout the United
States. The leased property houses agency offices and group insurance sales
offices. Hanover also leases offices throughout the country for its field
employees.
The Company believes that its facilities are adequate for its present needs
in all material respects.
ITEM 3
LEGAL PROCEEDINGS
Reference is made to Note 21 on page 81 of the Notes to Consolidated
Financial Statements of the 1998 Annual Report to Shareholders, the applicable
portions of which are incorporated herein by reference.
Sales Practices
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries by individual plaintiffs
alleging fraud, unfair or deceptive acts, breach of contract,
misrepresentation, and related claims in the sale of life insurance policies.
In October 1997, the plaintiffs voluntarily dismissed the Louisiana suit and
filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, the Company and the plaintiffs entered
into a settlement agreement. The court granted preliminary approval of the
settlement on December 4, 1998, and has scheduled a hearing in March 1999 to
consider final approval. Accordingly, AFC recognized a $20.2 million expense,
net of taxes, during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate
recognition of its obligation under the settlement, this estimate assumes the
availability of insurance coverage for certain claims, and the estimate may be
revised based on an amount of reimbursement actually tendered by AFC's
insurance carriers, if any, and based on changes in the Company's estimate of
the ultimate cost of the benefits to be provided to members of the class.
26
Other
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based
on the advice of legal counsel, the ultimate resolution of these proceedings
will not have a material effect on the Company's consolidated financial
statements.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
27
PART II
ITEM 5
MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
Common Stock and Shareholder Ownership
The common stock of Allmerica Financial Corporation is traded on the New
York Stock Exchange under the symbol "AFC". On March 15, 1999, the Company had
50,432 shareholders of record and 56,729,421 million shares outstanding. On
the same date, the trading price of the Company's common stock was $52 7/8 per
share.
Common Stock Prices and Dividends
High Low Dividends
------- -------- ---------
1998
First Quarter...................................... $66 3/8 $42 5/16 $0.05
Second Quarter..................................... $72 1/8 $61 5/16 $0.05
Third Quarter...................................... $72 1/8 $57 5/16 $0.05
Fourth Quarter..................................... $57 7/8 $39 1/4 --
1997
First Quarter...................................... $40 1/4 $32 5/8 $0.05
Second Quarter..................................... $40 3/8 $33 1/2 $0.05
Third Quarter...................................... $45 1/4 $39 1/4 $0.05
Fourth Quarter..................................... $51 $42 7/8 $0.05
1998 Dividend Schedule
Allmerica Financial Corporation declared no cash dividend during the fourth
quarter of 1998. The Company has announced its intention to change its common
stock dividend schedule from a quarterly basis to an annual basis. In
addition, the Company anticipates an annual dividend of $0.25 per share as
compared to prior years' quarterly dividends of $0.05 per share. The payment
of future dividends, if any, on the Company's Common Stock will be a business
decision made by the Board of Directors from time to time based upon the
results of operations and financial condition of the Company and such other
factors as the Board of Directors considers relevant.
Dividends paid by the Company may be funded from dividends paid to the
Company from its subsidiaries. Dividends from insurance subsidiaries are
subject to restrictions imposed by state insurance laws and regulations.
Reference is made to "Liquidity and Capital Resources" on pages 44-45 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and to Note 14 on page 76 of the Notes to Consolidated Financial
Statements of the 1998 Annual Report to Shareholders, the applicable portions
of which are incorporated herein by reference.
ITEM 6
SELECTED FINANCIAL DATA
Reference is made to the "Five Year Summary of Selected Financial
Highlights" on page 25 of the 1998 Annual Report to Shareholders, which is
incorporated herein by reference.
28
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 26-47 of the 1998 Annual Report
to Shareholders, which is incorporated herein by reference.
ITEM 7A
QUANTATATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 40-43 of the 1998 Annual Report
to Shareholders, which is incorporated herein by reference.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements on pages 49-53
and the accompanying Notes to Consolidated Financial Statements on pages 54-83
of the 1998 Annual Report to Shareholders which meet the requirements of
Regulation S-X, and which include a summary of quarterly results of
consolidated operations (see Note 23 of Notes to Consolidated Financial
Statements--page 83), which is incorporated herein by reference.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
Information regarding Directors of the Company is incorporated herein by
reference from the Proxy Statement for the Annual Meeting of Shareholders to
be held May 11, 1999, to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is biographical information concerning the executive
officers of the Company.
John F. O'Brien, 55
Director, Chief Executive Officer and President of the Company since February
1995
See biography under "Directors of the Registrant" above.
Bruce C. Anderson, 54
Vice President of the Company since February 1995
Mr. Anderson has been Vice President of AFC since February 1995 and Vice
President of Allmerica P&C and Citizens since March 1997. Mr. Anderson has
been employed by FAFLIC since 1967 and has been Vice President and Director of
FAFLIC since October 1984 and April 1996, respectively. In addition, Mr.
Anderson is a director and/or executive officer at various other non-public
affiliates.
Robert E. Bruce, 48
Vice President of the Company since July 1997
Mr. Bruce has been Vice President of AFC and Citizens since July 1997 and
Vice President and Director of Citizens and Hanover since August 1997. In
addition, Mr. Bruce has served as Vice President and Director of FAFLIC since
May 1995 and August 1997, respectively, and Chief Information Officer of
FAFLIC since February 1997. Mr. Bruce is also a director and/or executive
officer at various other non-public affiliates. Prior to joining FAFLIC in May
1995, Mr. Bruce was Corporate Manager at Digital Equipment Corporation, a
computer manufacturer, from May 1979 to March 1995.
John P. Kavanaugh, 44
Vice President and Chief Investment Officer of the Company since 1996
Mr. Kavanaugh has been Vice President and Chief Investment Officer of AFC
since September 1996, has been employed by FAFLIC since 1983, and has been
Vice President of FAFLIC since December 1991 and Vice President of AFLIAC
since January 1992. Mr. Kavanaugh has also served as Director and Chief
Investment Officer of FAFLIC, Hanover, Citizens Insurance and AFLIAC since
August 1996, and Vice President and Chief Investment Officer of Allmerica P&C
and Citizens since September 1996. Mr. Kavanaugh is also a director and/or
executive officer at various other non-public affiliates.
John F. Kelly, 60
Vice President and General Counsel of the Company since February 1995
Mr. Kelly has been Vice President, General Counsel and Assistant Secretary
of AFC since February 1995, has been employed by FAFLIC since July 1968, and
has been Senior Vice President and General Counsel of
30
FAFLIC since February 1986 and Director of FAFLIC since April 1996. In
addition to his positions with AFC and FAFLIC, Mr. Kelly has been Vice
President and General Counsel of Allmerica P&C since August 1992, Assistant
Secretary of Allmerica P&C since May 1995, Assistant Secretary of Citizens
since December 1992, and Vice President, General Counsel and Assistant
Secretary of Citizens since September 1993. Mr. Kelly was Secretary of
Allmerica P&C from August 1992 to May 1995. Mr. Kelly has been a Director of
AFLIAC since October 1982 and is a director and/or executive officer at
various other non-public affiliates.
J. Barry May, 51
Vice President of the Company since February 1997
Mr. May has been Vice President of AFC since February 1997, Vice President
of Allmerica P&C and President of Hanover since September 1996 and Director
and Vice President of Citizens since March 1997. He has been a Director of
Hanover and Citizens Insurance since September 1996. Mr. May served as Vice
President of Hanover from May 1995 to September 1996, as Regional Vice
President from February 1993 to May 1995 and as a General Manager of Hanover
from June 1989 to May 1995. Mr. May has been employed by Hanover since 1985.
In addition, Mr. May is a director and/or executive officer at various other
non-public affiliates.
James R. McAuliffe, 54
Vice President of the Company since February 1995
Mr. McAuliffe has been Vice President of AFC from February 1995 through
December 1995 and since February 1997, Vice President of Allmerica P&C since
August 1992, a Director of Allmerica P&C from August 1992 through December
1994, a Director and Vice President of Citizens since December 1992, and a
Director of AFLIAC from April 1987 through May 1995 and since May 1996. Mr.
McAuliffe has been President of Citizens Insurance since December 1994. Mr.
McAuliffe has been employed by FAFLIC since 1968, and served as Vice President
and Chief Investment Officer of FAFLIC from November 1986 through December
1994. Mr. McAuliffe also served as Vice President and Chief Investment Officer
of Allmerica P&C from August 1992 through December 1994, and Vice President
and Chief Investment Officer of AFLIAC from December 1986 through May 1995.
Additionally, Mr. McAuliffe is a director and/or executive officer at various
other non-public affiliates.
Edward J. Parry, III, 39
Vice President and Treasurer of the Company since February 1995
Chief Financial Officer of the Company since December 1996
Mr. Parry has been Chief Financial Officer of AFC since December 1996. He
has also been Vice President and Treasurer of AFC since February 1995. He has
served as Chief Financial Officer of FAFLIC, AFLIAC, Allmerica P&C, Hanover,
Citizens and Citizens Insurance since December 1996 and as Vice President and
Treasurer of FAFLIC, AFLIAC, Allmerica P&C and Hanover since February 1993 and
of Citizens since September 1993 and December 1992, respectively. Mr. Parry is
also a director and/or executive officer at various other non-public
affiliates.
Richard M. Reilly, 60
Vice President of the Company since February 1997
Mr. Reilly has been Vice President of AFC and FAFLIC since February 1997 and
November 1990, respectively, and Vice President of Allmerica P&C and Citizens
since March 1997. He has also been a Director and Vice President of AFLIAC
since November 1990 and President and Chief Executive Officer of AFLIAC since
August 1995. Mr. Reilly was Vice President of AFC from February 1995 through
December 1995. Additionally, Mr. Reilly has been the President of Allmerica
Investment Trust, Allmerica Funds, and Allmerica Securities Trust, each a
registered investment company, since February 1991, April 1991 and February
1991, respectively. Mr. Reilly is also a director and/or holds an executive
office at various other non-public affiliates.
31
Robert P. Restrepo, 48
Vice President of the Company since May 1998
Mr. Restrepo has been Vice President of AFC and President, Chief Executive
Officer and Director of Allmerica P&C since May 1998. Prior to joining AFC,
Mr. Restrepo was Chief Executive Officer, Personal Lines at Travelers Property
and Casualty, a member of the Travelers Group from January 1996 to May 1998.
Additionally, Mr. Restrepo was the Senior Vice President, Personal Lines at
Aetna Life & Casualty Company from March 1991 to January 1996. Mr. Restrepo is
also a director and/or executive officer at various other non-public
affiliates of AFC.
Eric A. Simonsen, 53
Vice President of the Company since February 1995
Mr. Simonsen has been Vice President of AFC since February 1995. He has been
a Vice President of APY since August 1992, of Citizens since December 1992 and
of AFLIAC since September 1990. He also served as a director of APY from
August of 1992 to July 1997. In addition, he has served as Vice President and
as a Director of FAFLIC since September 1990 and April 1996, respectively. Mr.
Simonsen has been President of Allmerica Services Corporation since December
1996. Mr. Simonsen was Chief Financial Officer of AFC from February 1995 to
December 1996, of FAFLIC and AFLIAC from September 1990 to December 1996, of
Allmerica P&C from August 1992 to December 1996 and of Citizens from December
1992 to December 1996. Mr. Simonsen is also a director and/or executive
officer at various other non-public affiliates.
Phillip E. Soule, 49
Vice President of the Company since February 1997
Mr. Soule has been Vice President of AFC, Citizens, and FAFLIC since
February 1997, March 1997 and February 1987, respectively, and of Allmerica
P&C since September 1996. He was Vice President of AFC from February 1995
through December 1995. Mr. Soule has been employed by FAFLIC since 1972 in
various capacities.
ITEM 11
EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 11, 1999, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 11, 1999, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 11, 1999, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
32
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The consolidated financial statements and accompanying notes thereto on
pages 49 through 83 of the 1998 Annual Report to Shareholders have been
incorporated herein by reference in their entirety.
Annual
Report
Page(s)
-------
Report of Independent Accountants.................................. 48
Consolidated Statements of Income for the years ended December 31,
1998, 1997
and 1996.......................................................... 49
Consolidated Balance Sheets as of December 31, 1998 and 1997....... 50
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.................................. 51
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996.................................. 52
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997
and 1996.......................................................... 53
Notes to Consolidated Financial Statements......................... 54-83
(a)(2) Financial Statement Schedules
Page No. in
Schedule this Report
-------- -----------
Report of Independent Accountants on Financial
Statement Schedules.................................... 39
I Summary of Investments--Other than Investments in
Related Parties........................................ 40
II Condensed Financial Information of Registrant.......... 41-43
III Supplementary Insurance Information.................... 44-46
IV Reinsurance............................................ 47
V Valuation and Qualifying Accounts...................... 48
VI Supplemental Information concerning Property/Casualty
Insurance Operations................................... 49
(a)(3) Exhibit Index
Exhibits filed as part of this Form 10-K are as follows:
2.1 Plan of Reorganization.+
2.2 Stock and Asset Purchase Agreement by an among State Mutual Life
Assurance Company of America, 440 Financial Group of Worcester, Inc.,
and The Shareholder Services Group, Inc. dated as of March 9, 1995.+
3.1 Certificate of Incorporation of AFC.+
3.2 By-Laws of AFC.+
4 Specimen Certificate of Common Stock.+
4.1 Form of Indenture relating to the Debentures between the Registrant and
State Street Bank & Trust Company, as trustee.++
4.2 Form of Global Debenture.++
4.3 Amended and Restated Declaration of Trust of AFC Capital Trust I dated
February 3, 1997.+++++
4.4 Indenture dated February 3, 1997 relating to the Junior Subordinated
Debentures of AFC.+++++
4.5 Series A Capital Securities Guarantee Agreement dated February 3,
1997.+++++
4.6 Common Securities Guarantee Agreement dated February 3, 1997.+++++
33
4.8 Rights Agreement dated as of December 16, 1997, between the
Registrant and First Chicago Trust Company of New York as Rights
Agent, filed as Exhibit 1 to the Company's Form 8-A dated
December 17, 1997 is incorporated herein by reference.
10.3 Administrative Services Agreement between State Mutual Life
Assurance Company of America and The Hanover Insurance Company,
dated July 19, 1989.+
10.4 First Allmerica Financial Life Insurance Company Employees'
401(k) Matched Savings Plan incorporated by reference to Exhibit
10.1 to the Allmerica Financial Corporation Registration
Statement on Form 8-K (No. 333-576) and incorporated herein by
reference originally filed with the Commission on January 24,
1996.
10.5 State Mutual Life Assurance Company of America Excess Benefit
Retirement Plan.+
10.6 State Mutual Life Assurance Company of America Supplemental
Executive Retirement Plan.+
10.7 State Mutual Incentive Compensation Plan.+
10.8 State Mutual Companies Long-Term Performance Unit Plan.+
10.9 Indenture of Lease between State Mutual Life Assurance Company
of America and the Hanover Insurance Company dated July 3, 1984
and corrected First Amendment to Indenture of Lease dated
December 20, 1993.+
10.12 Lease dated March 23, 1993 by and between Aetna Life Insurance
Company and State Mutual Life Assurance Company of America,
including amendments thereto, relating to property in Atlanta,
Georgia.+
10.13 Stockholder Services Agreement dated as of January 1, 1992
between Private Healthcare Systems, Inc. and State Mutual Life
Assurance Company of America, the successor to its wholly-owned
subsidiary, Group Healthcare Network, Inc.+
10.14 Lease dated January 26, 1995 by and between Citizens Insurance
and Upper Peninsula Commission for Area Progress, Inc.,
including amendments thereto, relating to property in Escanaba,
Michigan.+
10.16 Trust Indenture for the State Mutual Life Assurance Company of
America Employees' 401(k) Matched Savings Plan between State
Mutual Life Assurance Company of America and Bank of
Boston/Worcester.+
10.17 State Mutual Life Assurance Company of America Non-Qualified
Executive Retirement Plan.+
10.18 State Mutual Life Assurance Company of America Non-Qualified
Executive Deferred Compensation Plan.+
10.19 The Allmerica Financial Cash Balance Pension Plan incorporated
by reference to Exhibit 10.19 to the Allmerica Financial
Corporation September 30, 1995 report on Form 10-Q and
incorporated herein by reference.
10.20 The Allmerica Financial Corporation Employment Continuity
Plan.++++++
10.21 Amended and Restated Form of Non-Solicitation Agreement executed
by substantially all of the executive officers of AFC
incorporated by reference to Exhibit 10.21 to the Allmerica
Financial Corporation June 30, 1997 report on Form 10-Q and
incorporated herein by reference.
10.23 Amended Allmerica Financial Corporation Long-Term Stock
Incentive Plan.+++++++
10.24 The Allmerica Financial Corporation Director Stock Ownership
Plan incorporated by reference to Exhibit 10.21 to the Allmerica
Financial Corporation June 30, 1996 report on Form 10-Q and
incorporated herein by reference.
10.25 Reinsurance Agreement dated September 29, 1997 between First
Allmerica Financial Life Insurance Company and Metropolitan Life
Insurance Company.+++++++
10.26 Consolidated Service Agreement between Allmerica Financial
Corporation and its subsidiaries, dated January 1, 1998.+++++++
10.27 Deferral Agreement, dated April 4, 1997, between Allmerica
Financial Corporation and John F. O'Brien.+++++++
10.28 Severance Agreement, dated September 25, 1997, between First
Allmerica Financial Life Insurance Company and Larry C.
Renfro.+++++++
34
10.29 Credit agreement dated as of June 17, 1998 between the Registrant and
the Chase Manhattan Bank incorporated by reference to Exhibit 10.29 to
the Allmerica Financial Corporation June 30, 1998 report on Form 10-Q
and incorporated herein by reference.
10.30 Form of Deferral Agreement executed by substantially all of the
executive officers of AFC dated January 30, 1998.
10.31 Form of Restricted Stock Agreement, dated January 30, 1998 and
executed by substantially all of the executive officers of AFC.
10.32 Form of Converted Stock Agreement, dated January 30, 1998 and executed
by substantially all of the executive officers of AFC.
10.33 Employment Agreement, dated May 13, 1998 between First Allmerica
Financial Life Insurance Company and Robert P. Restrepo, Jr.
10.34 Restricted Stock Agreement, dated May 26, 1998, between Allmerica
Financial Corporation and Robert P. Restrepo, Jr.
10.35 Credit agreement dated as of December 1, 1998 between the Registrant
and the Chase Manhattan Bank.
13 The following sections of the Annual Report to Shareholders for 1998
("1998 Annual Report") which are expressly incorporated by reference
into this Annual Report on Form 10-K:
. Management's Discussion and Analysis of Financial Condition and
Results of Operations at pages 26 through 47 of the 1998 Annual
Report.
. Consolidated Financial Statements and Notes thereto at pages 49
through 83 of the 1998 Annual Report.
. Independent Auditors' Report at page 48 of the 1998 Annual Report.
. The information appearing under the caption "Five Year Summary of
Selected Financial Highlights" at page 25 of the 1998 Annual Report.
. The information appearing under the caption "Shareholder
Information" at page 85 of the 1998 Annual Report.
21 Subsidiaries of AFC.
23 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney.
27 Financial Data Schedule.
99.1 Internal Revenue Service Ruling dated April 15, 1995.+
99.2 Important Factors Regarding Forward Looking Statements.
- --------
+ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's Registration Statement on Form
S-1 (No. 33-91766) originally filed with the Commission on May 1,
1995.
++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's Registration Statement on Form
S-1 (No. 33-96764) originally filed with the Commission on September
11, 1995.
+++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1995 Annual Report on Form 10-K
originally filed with the Commission on March 28, 1996.
++++ Incorporated by herein by reference to Exhibit I of the Current Report
of the Registrant (Commission File No. 1-13754) filed February 20,
1997.
+++++ Incorporated herein by reference to Exhibits 2, 3, 4, 5 and 6,
respectively, contained in the Registrant's Current Report on Form 8-K
filed on February 5, 1997.
++++++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1996 Annual Report on Form 10-K
originally filed with the Commission on March 24, 1997.
+++++++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1997 Annual Report on Form 10-K
originally filed with the Commission on March 27, 1998
35
(b) Reports on Form 8-K
On October 15, 1998, Allmerica Financial Corporation announced that third
quarter operating earnings will be impacted by an estimated $0.25 to $0.30 per
share as a result of losses relating to increased frequency of catastrophes
and lower investment income.
On October 27, 1998, Allmerica Financial Corporation announced that it, or a
subsidiary, would commence a cash tender offer to acquire all of the
outstanding shares of Citizens Corporation that it did not already own.
On October 29, 1998, Allmerica Financial Corporation announced its financial
results for the three months ended September 30, 1998.
On November 16, 1998, Allmerica Financial Corporation and Citizens
Corporation announced that pursuant to an agreement between the Special
Committee of the Board of Directors of Citizens Corporation and Allmerica
Financial Corporation, the offer price in the outstanding Offer to Purchase by
Allmerica was increased and amended to $33.25 per share in cash. The Citizens
Special Committee agreed to recommend that Citizens stockholders accept the
revised offer price and tender their shares.
On November 24, 1998, Allmerica Financial Corporation announced that fourth
quarter results will be negatively impacted by an estimated $11 million in
pre-tax catastrophe losses as a result of a sustained wind storm that struck
Michigan during early November 1998.
On December 4, 1998, Allmerica Financial Corporation announced that it
reached a settlement agreement in a class action lawsuit in connection with
the sale of life insurance policies issued by the Company from 1978 to May 31,
1998. The settlement agreement is subject to a court determination that it is
fair and reasonable, and to court approval. The fairness hearing is expected
to be held during the spring of 1999.
On December 14, 1998, Allmerica Financial Corporation issued a press release
relating to the consummation of the merger of Citizens Acquisition Corporation
with and into Citizens Corporation. As a result of such merger, Citizens
Corporation became a wholly-owned subsidiary of Allmerica Financial
Corporation.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Allmerica Financial Corporation
Registrant
Date: March 24, 1999 /s/ John F. O'Brien
By: _________________________________
John F. O'Brien,
Chairman of the Board,
Chief Executive Officer and
President
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 24, 1999 /s/ John F. O'Brien
By: _________________________________
John F. O'Brien,
Chairman of the Board,
Chief Executive Officer and
President
Date: March 24, 1999 /s/ Edward J. Parry, III
By: _________________________________
Edward J. Parry III,
Vice President, Chief Financial
Officer, Treasurer and Principal
Accounting Officer
Date: March 24, 1999 *
By: _________________________________
Michael P. Angelini,
Director
Date: March 24, 1999 *
By: _________________________________
Gail L. Harrison,
Director
Date: March 24, 1999
By: _________________________________
Robert P. Henderson,
Director
Date: March 24, 1999 *
By: _________________________________
M. Howard Jacobson,
Director
Date: March 24, 1999 *
By: _________________________________
J. Terrence Murray,
Director
Date: March 24, 1999 *
By: _________________________________
Robert J. Murray,
Director
37
Date: March 24, 1999 *
By: _________________________________
John L. Sprague,
Director
Date: March 24, 1999 *
By: _________________________________
Robert G. Stachler,
Director
Date: March 24, 1999 *
By: _________________________________
Herbert M. Varnum,
Director
Date: March 24, 1999 *
By: _________________________________
Richard M. Wall,
Director
/s/ Edward J. Parry
*By: ________________________________
Edward J. Parry,
Attorney-in-fact
38
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of Allmerica Financial Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 2, 1999, appearing in the Allmerica Financial Corporation 1998
Annual Report to Shareholders (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
_____________________________________
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999
39
Schedule I
ALLMERICA FINANCIAL CORPORATION
Summary of Investments--Other than Investments in Related Parties
December 31, 1998
Amount at
which shown
in the balance
Type of Investment Cost (1) Value sheet
- ------------------ -------- ------- --------------
(In millions)
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities.................. $ 213.1 $ 201.4 $ 201.4
States, municipalities and political
subdivisions.............................. 2,408.9 2,486.7 2,486.7
Foreign governments........................ 107.9 111.1 111.1
Public utilities........................... 431.3 434.6 434.6
All other corporate bonds.................. 4,161.6 4,244.0 4,244.0
Redeemable preferred stocks.................. 295.4 303.0 303.0
-------- ------- --------
Total fixed maturities..................... 7,618.2 7,780.8 7,780.8
-------- ------- --------
Equity securities:
Common stocks:
Public utilities........................... 3.7 4.6 4.6
Banks, trust and insurance companies....... 9.1 16.7 16.7
Industrial, miscellaneous and all other.... 215.6 353.9 353.9
Nonredeemable preferred stocks............... 24.7 21.9 21.9
-------- ------- --------
Total equity securities.................... 253.1 397.1 397.1
-------- ------- --------
Mortgage loans on real estate.................. 562.3 XXXXXX 562.3
Real estate (2)................................ 20.4 XXXXXX 20.4
Policy loans................................... 154.3 XXXXXX 154.3
Other long-term investments.................... 142.7 XXXXXX 142.7
-------- --------
Total investments.......................... $8,751.0 XXXXXX $9,057.6
======== ========
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums and
accretion of discounts.
(2) Includes $14.5 million of real estate acquired through foreclosure.
40
Schedule II
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Statements of Income for the Years Ended December 31,
1998 1997 1996
------ ------ ------
(In millions)
Revenues
Net investment income............................... $ 7.1 $ 11.4 $ 2.7
Net realized investment gains (losses).............. 1.7 (0.2) (0.9)
------ ------ ------
Total revenues.................................... 8.8 11.2 1.8
------ ------ ------
Expenses
Interest expense.................................... 40.5 41.1 15.3
Operating expenses.................................. 2.5 5.0 3.3
------ ------ ------
Total expenses.................................... 43.0 46.1 18.6
------ ------ ------
Net income before federal income taxes and equity in
net income of unconsolidated subsidiaries............ (34.2) (34.9) (16.8)
Income tax benefit:
Federal............................................. 12.4 11.8 5.9
State............................................... 0.5 0.5 --
Equity in net income of unconsolidated subsidiaries... 222.5 231.8 192.8
------ ------ ------
Net income............................................ $201.2 $209.2 $181.9
====== ====== ======
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
41
Schedule II
(continued)
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Balance Sheets
December 31,
------------------
1998 1997
-------- --------
(In millions,
except share and
per share data)
Assets
Fixed maturities-at fair value (amortized cost of $0.8 and
$3.4).................................................... $ 0.9 $ 3.5
Cash and cash equivalents................................. 2.9 0.9
Investment in unconsolidated subsidiaries................. 3,008.0 2,898.7
Receivable from subsidiaries.............................. 43.9 --
Other assets.............................................. 0.5 12.8
-------- --------
Total assets............................................ $3,056.2 $2,915.9
======== ========
Liabilities
Expenses and taxes payable................................ $ 34.7 $ 10.0
Interest and dividends payable............................ 13.0 15.8
Short-term debt........................................... 41.1 --
Long-term debt............................................ 508.8 508.8
-------- --------
Total liabilities....................................... 597.6 534.6
-------- --------
Shareholders' Equity
Preferred stock, par value $0.01 per share, 20.0 million
shares authorized, none issued........................... -- --
Common stock, par value $0.01 per share, 300.0 million
shares authorized, 60.4 million and 60.0 million shares
issued at December 31, 1998 and December 31, 1997,
respectively............................................. 0.6 0.6
Additional paid-in capital................................ 1,768.8 1,755.1
Accumulated other comprehensive income.................... 180.5 217.3
Retained earnings......................................... 599.9 408.3
Treasury stock at cost (1.8 million shares)............... (91.2) --
-------- --------
Total shareholders' equity.............................. 2,458.6 2,381.3
-------- --------
Total liabilities and shareholders' equity.............. $3,056.2 $2,915.9
======== ========
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
42
Schedule II (continued)
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Statement of Cash Flows for the Years Ended December 31,
1998 1997 1996
------- ------- -------
(In millions)
Cash flows from operating activities
Net income......................................... $ 201.2 $ 209.2 $ 181.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries.... (222.5) (231.8) (192.8)
Net realized investment (gains) losses............ (1.7) 0.2 0.9
Change in expenses and taxes payable.............. 24.7 0.9 0.9
Change in interest and dividends payable.......... (2.8) 10.0 0.1
Change in receivable from subsidiaries............ (43.9) -- --
Other, net........................................ 8.0 (0.3) (3.8)
------- ------- -------
Net cash used in operating activities............... (37.0) (11.8) (12.8)
------- ------- -------
Cash flows from investing activities
Capital contributed to unconsolidated
subsidiaries...................................... (95.7) (79.9) --
Proceeds from disposals and maturities of
available-for-sale fixed maturities............... 123.9 98.7 32.7
Purchase of available-for-sale fixed maturities.... -- (74.9) (59.6)
Purchase of minority interest in Allmerica P&C..... -- (425.6) --
Proceeds from sale of common stock of subsidiary... -- 195.0 --
Purchase of equity securities...................... -- -- (0.7)
------- ------- -------
Net cash provided by (used in) investing
activities......................................... 28.2 (286.7) (27.6)
------- ------- -------
Cash flow from financing activities
Increase in long-term debt......................... -- 9.3 --
Dividend received from FAFLIC...................... 50.0 -- --
Net proceeds from issuance of commercial paper..... 41.1 -- --
Net proceeds from issuance of common stock......... 11.4 2.8 --
Proceeds from the issuance of mandatorily
redeemable preferred securities of a subsidiary
trust holding solely junior subordinated
debentures of the Company......................... -- 296.3 --
Treasury stock purchase............................ (82.7) -- --
Dividends paid to shareholders..................... (9.0) (11.5) (10.0)
------- ------- -------
Net cash provided by (used in) financing
activities......................................... 10.8 296.9 (10.0)
------- ------- -------
Net change in cash and cash equivalents............. 2.0 (1.6) (50.4)
Cash and cash equivalents at beginning of the
period............................................. 0.9 2.5 52.9
------- ------- -------
Cash and cash equivalents at end of the period...... $ 2.9 $ 0.9 $ 2.5
======= ======= =======
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
43
Schedule III
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 1998
Future
policy Amortiza-
benefits, Other Benefits, tion of
Deferred losses, policy claims, deferred
policy claims and claims and Net invest- losses and policy Other Prem-
acquisi- loss Unearned benefits Premium ment settlement acquisi- operating iums
tion costs expenses premiums payable revenue income expenses tion costs expenses written
---------- ---------- -------- ---------- -------- ----------- ---------- ---------- --------- --------
(In millions)
Risk Management
Property and Ca-
sualty.......... $ 164.9 $2,597.3 $834.9 $ 10.5 $1,966.3 $228.9 $1,493.7 $379.7 $187.1 $1,955.1
Corporate Risk
Management
Services........ 2.6 358.1 5.2 10.9 336.0 20.7 248.9 3.2 185.6 --
Retirement and
Asset
Accumulation
Allmerica Finan-
cial Services... 993.1 2,663.1 3.1 823.8 2.7 253.1 219.3 69.6 211.6 --
Allmerica Asset
Management...... 0.6 -- -- 1,791.8 -- 111.4 89.3 0.3 8.4 --
Corporate........ -- -- -- -- -- 11.9 -- -- 63.8 --
Eliminations..... -- -- -- -- -- (1.8) -- -- (7.6) --
-------- -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $1,161.2 $5,618.5 $843.2 $2,637.0 $2,305.0 $624.2 $2,051.2 $452.8 $648.9 $1,955.1
======== ======== ====== ======== ======== ====== ======== ====== ====== ========
44
Schedule III (continued)
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 1997
Future
policy Amortiza-
benefits, Other Benefits, tion of
Deferred losses, policy claims, deferred
policy claims and claims and Net invest- losses and policy Other Prem-
acquisi- loss Unearned benefits Premium ment settlement acquisi- operating iums
tion costs expenses premiums payable revenue income expenses tion costs expenses written
---------- ---------- -------- ---------- -------- ----------- ---------- ---------- --------- --------
(In millions)
Risk Management
Property and Ca-
sualty.......... $167.2 $2,615.4 $838.3 $ 10.8 $1,953.1 $253.3 $1,445.5 $399.9 $198.4 $1,991.8
Corporate Risk
Management
Services........ 2.9 331.4 6.3 9.2 333.0 23.1 238.9 3.3 136.8 --
Retirement and
Asset
Accumulation
Allmerica Finan-
cial Services... 794.5 2,476.9 2.2 847.5 24.9 281.6 256.1 8.1 217.8 --
Allmerica Asset
Management...... 0.9 -- -- 985.2 0.1 82.5 64.2 0.5 8.0 --
Corporate........ -- -- -- -- -- 14.0 -- -- 64.1 --
Eliminations..... -- -- -- -- -- (1.1) -- -- (11.5) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $965.5 $5,423.7 $846.8 $1,852.7 $2,311.1 $653.4 $2,004.7 $411.8 $613.6 $1,991.8
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
45
Schedule III (continued)
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 1996
Future
policy Amortiza-
benefits, Other Benefits, tion of
Deferred losses, policy claims, deferred
policy claims and claims and Net invest- losses and policy Other Prem-
acquisi- loss Unearned benefits Premium ment settlement acquisi- operating iums
tion costs expenses premiums payable revenue income expenses tion costs expenses written
---------- ---------- -------- ---------- -------- ----------- ---------- ---------- --------- --------
(In millions)
Risk Management
Property and Ca-
sualty.......... $164.2 $2,744.1 $815.1 $ 12.8 $1,898.3 $233.2 $1,383.4 $396.6 $195.1 $1,914.4
Corporate Risk
Management
Services........ 2.9 299.0 4.7 11.1 302.9 22.1 211.3 3.1 128.0 --
Retirement and
Asset Accumulation
Allmerica Finan-
cial Services... 654.7 2,514.7 2.7 935.2 35.1 311.2 273.1 57.3 154.3 --
Allmerica Asset
Management...... 0.9 -- -- 1,101.3 -- 101.5 89.2 0.5 9.3 --
Corporate........ -- -- -- -- -- 5.5 -- -- 64.9 --
Eliminations..... -- -- -- -- -- (0.9) -- -- (12.7) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $822.7 $5,557.8 $822.5 $2,060.4 $2,236.3 $672.6 $1,957.0 $457.5 $538.9 $1,914.4
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
46
Schedule IV
ALLMERICA FINANCIAL CORPORATION
Reinsurance
December 31,
Assumed Percentage
Ceded to From of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
--------- --------- --------- --------- ----------
(In millions)
1998
Life insurance in force..... $44,790.9 $23,886.9 $555.4 $21,459.4 2.59%
========= ========= ====== ========= =====
Premiums:
Life insurance............ $ 73.8 $ 13.9 $ 3.8 $ 63.7 5.97%
Accident and health
insurance................ 342.8 175.9 108.1 275.0 39.31%
Property and casualty
insurance................ 1,967.9 66.1 64.5 1,966.3 3.28%
--------- --------- ------ ---------
Total premiums.............. $ 2,384.5 $ 255.9 $176.4 $ 2,305.0 7.65%
========= ========= ====== ========= =====
1997
Life insurance in force..... $44,902.9 $ 7,237.1 $308.9 $37,974.7 0.81%
========= ========= ====== ========= =====
Premiums:
Life insurance............ $ 70.0 $ 15.6 $ 8.7 $ 63.1 13.79%
Accident and health
insurance................ 347.4 154.5 102.0 294.9 34.59%
Property and casualty
insurance................ 2,046.2 195.1 102.0 1,953.1 5.22%
--------- --------- ------ ---------
Total premiums.............. $ 2,463.6 $ 365.2 $212.7 $ 2,311.1 9.20%
========= ========= ====== ========= =====
1996
Life insurance in force..... $41,943.1 $ 7,135.8 $559.2 $35,366.5 1.58%
========= ========= ====== ========= =====
Premiums:
Life insurance............ $ 72.0 $ 18.1 $ 5.9 $ 59.8 9.87%
Accident and health
insurance................ 317.1 120.8 81.9 278.2 29.44%
Property and casualty
insurance................ 2,018.5 232.6 112.4 1,898.3 5.92%
--------- --------- ------ ---------
Total premiums.............. $ 2,407.6 $ 371.5 $200.2 $ 2,236.3 8.95%
========= ========= ====== ========= =====
47
Schedule V
ALLMERICA FINANCIAL CORPORATION
Valuation and Qualifying Accounts
December 31,
Additions
--------------------- Deductions
Balance at Charged to Charged to from Balance at
Beginning of Costs and Other Allowance End of
Period Expense Accounts Account Period
------------ ---------- ---------- ---------- ----------
(In millions)
1998
Mortgage loans.......... $20.7 $(6.8) $-- $ 2.4 $11.5
Allowance for doubtful
accounts............... 6.1 4.4 -- 5.1 5.4
----- ----- ---- ----- -----
$26.8 $(2.4) $-- $ 7.5 $16.9
===== ===== ==== ===== =====
1997
Mortgage loans.......... $19.6 $ 2.5 $-- $ 1.4 $20.7
Real estate............. 14.9 6.0 -- 20.9 --
Allowance for doubtful
accounts............... 4.5 5.7 -- 4.1 6.1
----- ----- ---- ----- -----
$39.0 $14.2 $ -- $26.4 $26.8
===== ===== ==== ===== =====
1996
Mortgage loans.......... $33.8 $ 5.5 $-- $19.7 $19.6
Real estate............. 19.6 -- -- 4.7 14.9
Allowance for doubtful
accounts............... 4.6 6.8 -- 6.9 4.5
----- ----- ---- ----- -----
$58.0 $12.3 $ -- $31.3 $39.0
===== ===== ==== ===== =====
48
Schedule VI
ALLMERICA FINANCIAL CORPORATION
Supplemental Information Concerning Property and Casualty Insurance Operations
For the Years Ended December 31,
Discount, if
Reserves for any,
Deferred Losses and Deducted
Policy Loss from Net Net
Acquisition Adjustment Previous Unearned Premiums Investment
Affiliation with Registrant Costs Expenses(2) Column(1) Premiums(2) Earned Income
- --------------------------- ----------- ------------ ------------ ----------- -------- ----------
(In millions)
Consolidated Property and
Casualty
Subsidiaries
1998.................... $164.9 $2,597.3 $-- $834.9 $1,966.3 $228.9
====== ======== ==== ====== ======== ======
1997.................... $167.2 $2,615.4 $-- $838.3 $1,953.1 $253.3
====== ======== ==== ====== ======== ======
1996.................... $164.2 $2,744.1 $-- $815.1 $1,898.3 $233.2
====== ======== ==== ====== ======== ======
Amortization
Losses and Loss of Deferred Paid Losses
Adjustment Expenses Policy and Loss Net
------------------------ Acquisition Adjustment Premiums
Current Year Prior Years Expenses Expenses Written
------------ ----------- ------------ ----------- --------
1998.............. $1,609.0 $(127.2) $379.7 $1,514.9 $1,955.1
======== ======= ====== ======== ========
1997.............. $1,564.1 $(127.9) $399.9 $1,507.2 $1,991.8
======== ======= ====== ======== ========
1996.............. $1,513.3 $(141.4) $396.6 $1,387.2 $1,914.4
======== ======= ====== ======== ========
- --------
(1) The Company does not employ any discounting techniques.
(2) Reserves for losses and loss adjustment expenses are shown gross of $591.7
million, $576.7 million and $626.9 million of reinsurance recoverable on
unpaid losses in 1998, 1997 and 1996, respectively. Unearned premiums are
shown gross of prepaid premiums of $37.9 million, $30.0 million and $45.5
million in 1998, 1997 and 1996, respectively.
49